As filed with the Securities and Exchange Commission on October 28, 1999
1933 Act Registration No. 333-66181
1940 Act Registration No. 811-09079
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. _____ [ 1 ]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. _____ [ 2 ]
(Check appropriate box or boxes)
MORGAN KEEGAN SELECT FUND, INC.
(Exact name of registrant as specified in charter)
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
(Address of principal executive offices)
Registrant's telephone number, including area code: (901) 524-4100
ALLEN B. MORGAN, JR.
Morgan Keegan Tower
Memphis, Tennessee 38103
(Name and Address of Agent for Service)
Copies to:
ARTHUR J. BROWN, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[ X ] On November 1, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] On ________________ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] On _________ pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Morgan Keegan Select Fund, Inc.
Contents of Registration Statement
This Registration Statement consists of the following papers and documents.
Cover Sheet
Contents of Registration Statement
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
PROSPECTUS
Morgan Keegan Intermediate Bond Fund
A BOND FUND FOR INVESTORS WHO SEEK TO EARN A HIGH LEVEL OF INCOME PRIMARILY FROM
INTERMEDIATE MATURITY, INVESTMENT GRADE BONDS.
Morgan Keegan High Income Fund
A BOND FUND FOR INVESTORS WHO CAN ACCEPT HIGHER RISK AND SEEK TO EARN A HIGH
LEVEL OF INCOME PRIMARILY FROM BELOW INVESTMENT GRADE BONDS.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the fund's shares or determined whether this prospectus
is complete or accurate. To state otherwise is a crime.
November 1, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
Morgan Keegan Intermediate Bond Fund...................................1
Principal Objectives.................................................1
Principal Investment Strategies......................................1
Principal Risks......................................................1
Fees and Expenses of the Fund........................................3
Morgan Keegan High Income Fund.........................................5
Principal Objectives.................................................5
Principal Investment Strategies......................................5
Principal Risks......................................................5
Fees and Expenses of the Fund........................................7
Your Account...........................................................9
Buying shares........................................................9
Choosing a Share Class...............................................9
Class Comparison.....................................................9
Policies for Buying Shares..........................................11
To Add to an Account................................................11
Buying Shares Through an Investment Broker..........................11
Internet............................................................12
Selling Shares......................................................12
To Sell Some or All of Your Shares..................................12
Account Policies......................................................13
Additional Policies...................................................14
Investor Services.....................................................14
Funds'Management and Investment Adviser...............................15
Funds'Portfolio Manager...............................................15
Funds'Distributor.....................................................15
Distributions.........................................................16
Tax Considerations....................................................16
More About Risk.......................................................16
Other Securities and Risks..........................................16
Financial Highlights..................................................18
Account Application...................................................19
For Additional Information............................................25
i
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MORGAN KEEGAN INTERMEDIATE BOND FUND
PRINCIPAL OBJECTIVES
The fund seeks a high level of income by investing in intermediate maturity,
investment grade bonds. The fund seeks capital growth as a secondary objective,
when consistent with the fund's primary objective.
PRINCIPAL INVESTMENT STRATEGIES
The fund seeks to achieve its objectives by investing at least 65% of its total
assets in investment grade, intermediate term maturity bonds (those bonds rated
investment grade by at least one nationally recognized statistical rating
organization ("NRSRO") with effective maturities of 1 to 10 years) that Morgan
Asset Management, Inc. (the "Adviser") believes offer attractive yield and
capital appreciation potential. Investment grade securities purchased by the
fund will be rated, at the time of investment, at least BBB by at least one
NRSRO including, but not limited to, Standard & Poor's Ratings Group ("S&P") and
Moody's Investors Service, Inc. ("Moody's") or, if unrated, will be determined
by the Adviser to be of comparable quality. If a security satisfies the fund's
minimum rating criteria at the time of purchase and is subsequently downgraded
below such rating, the fund will not be required to dispose of such security. If
a downgrade occurs, the Adviser will consider what action, including the sale of
such security, is in the best interest of the fund and its shareholders. The
policy of the fund is to keep the portfolio's average effective maturity between
3 and 10 years.
In managing the fund's portfolio, the Adviser will focus on those securities
believed to offer the most attractive value relative to alternative investments.
That is, the Adviser will invest in securities that it believes offer
potentially better yield or total return (the combination of yield and price
appreciation) than securities of comparable rating and maturity. Similarly, the
Adviser will sell securities that it believes no longer offer potentially better
yield or total return than other available securities. This strategy is
generally referred to as a "value" approach and is primarily concerned with
individual security and sector selection. In addition, the Adviser's strategy
does not attempt to forecast interest rate movements; rather the goal is to keep
the fund's assets "fully invested" (hold a minimal amount of cash reserves --
generally less than 10%) and to maintain a relatively stable average effective
portfolio maturity.
The fund may invest in U.S. Government securities, corporate bonds, debentures,
notes, preferred stock, mortgage-backed and asset-backed securities. Moreover,
in addition to purchasing investment grade securities to fulfill its investment
objectives, the fund may invest up to 35% of its assets in below investment
grade bonds (commonly referred to as "junk bonds"), convertible securities and
common stocks.
PRINCIPAL RISKS
An investment in the fund is not guaranteed. As with any mutual fund, the value
of the fund's shares will change and you could lose money by investing in the
fund. In addition, the performance of the fund depends on the Adviser's ability
to implement the investment strategy of the fund.
A variety of factors may influence the fund's investment performance, such as:
o BOND MARKET RISK. For bonds, market risk generally reflects credit risk
and interest rate risk. Credit risk is the risk that the issuer of the
bond will not pay or is perceived as less likely to pay the interest
and principal payments when due. Bond value
1
<PAGE>
typically declines if the issuer's credit quality deteriorates.
Interest rate risk is the risk that interest rates will rise and the
value of bonds will fall. A broad-based market drop may also cause a
bond's price to fall. Interest rate risk is generally greater the
longer the remaining maturity of the bonds. Prices will usually
decrease more for a longer term bond when interest rates rise.
o PREPAYMENT RISK. During periods of falling interest rates, there is the
risk that a debt security with a high state interest rate will be
prepaid before its expected maturity rate. This is a risk especially
associated with mortgage and asset backed securities.
o BELOW INVESTMENT GRADE BONDS. These bonds involve a higher degree of
credit risk. In the event of an unanticipated default, the fund would
experience a reduction in its income, a decline in the market value of
the securities so affected and a decline in the value of its shares.
During an economic downturn or substantial period of rising interest
rates, highly leveraged issuers may experience financial stress which
could adversely affect their ability to service principal and interest
payment obligations, to meet projected business goals and to obtain
additional financing. The market prices of below investment grade bonds
are generally less sensitive to interest rate changes than higher-rated
investments, but more sensitive to adverse economic or political
changes, or individual developments specific to the issuer. Periods of
economic or political uncertainty and change can be expected to result
in volatility of prices of these securities. NRSROs consider these
bonds to be speculative in nature.
o EQUITY SECURITY RISK. Because the fund can invest in U.S.-traded equity
securities, it is subject to stock market risk. Stock prices typically
fluctuate more than the values of other types of securities such as
U.S. government securities, corporate bonds and preferred stock,
typically in response to changes in the particular company's financial
condition and factors affecting the market in general. For example,
unfavorable or unanticipated poor earnings performance of the company
may result in a decline in its stock's price, and a broad-based market
drop may also cause a stock's price to fall.
2
<PAGE>
FEES AND EXPENSES OF THE INTERMEDIATE BOND FUND
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (fees paid directly
from your investment) Class A Class C Class I
- -------------------------------------------------------------------------
Maximum sales charge (Load) 2.00% 0.00% 0.00%
(as a percentage of offering price)
Maximum deferred sales charge (Load) 0.00% 1.00% 0.00%
(as a percentage of the lesser of the
offering price or net asset value)
Maximum sales charge (Load) Imposed None None None
on reinvested dividends and other
distributions
Redemption Fee (as a percentage of None None None
amount redeemed)
Exchange Fee None None None
Maximum Account Fee None None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund
assets) Class A Class C Class I
- --------------------------------------------------------------------------
Management fee 0.40% 0.40% 0.40%
Distribution (12b-1) fees 0.25% 0.60% 0.00%
Other expenses(1) 0.40% 0.40% 0.40%
----------------------------------
Total annual fund operating expenses(2) 1.05% 1.40% 0.80%
==================================
Fee Waiver 0.15% 0.15% 0.15%
==================================
Net Expenses: 0.90% 1.25% 0.65%
(1)Because the fund had no operations prior to March 22, 1999, these expenses
are estimated for its first year of operations.
(2)The Adviser has agreed to waive its fee and to reimburse the fund until
March 22, 2000 to the extent its total annual operating expenses (excluding
brokerage, interest, taxes, and extraordinary expenses) exceed 0.90% of net
assets of Class A shares, 1.25% of net assets of Class C shares and 0.65% of
net assets of Class I shares.
EXAMPLE
This Example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This Example assumes that you invest $10,000 in the fund and then redeem all of
your shares at the end of the time periods indicated. The Example also assumes
that your investment has a 5% return each year and that the fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
3
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Class A Class C Class I
-------------------------------------------
1 Year $290 $229 $ 67
1 Year (if shares are not
redeemed) $290 $129 $ 67
3 Years (whether or not
shares are redeemed) $514 $431 $241
4
<PAGE>
MORGAN KEEGAN HIGH INCOME FUND
PRINCIPAL OBJECTIVES
The fund seeks a high level of income by investing in below investment grade
bonds (commonly referred to as "junk bonds"). The fund seeks capital growth as a
secondary objective.
PRINCIPAL INVESTMENT STRATEGIES
The fund seeks to achieve its objectives by investing at least 65% of its total
assets in below investment grade bonds (bonds that are rated BB or below by an
NRSRO, and that are deemed to be speculative as to the issuer's ability to make
payments of principal and interest when due) that the Adviser believes offer
attractive yield and capital appreciation potential. All securities purchased by
the fund will be rated, at the time of investment, at least CCC by at least one
NRSRO including, but not limited to, S&P and Moody's or, if unrated, determined
by the Adviser to be of comparable quality. If a security satisfies the fund's
minimum rating criteria at the time of purchase and is subsequently downgraded
below such rating, the fund will not be required to dispose of such security. If
a downgrade occurs, the Adviser will consider what action, including the sale of
such security, is in the best interest of the fund and its shareholders.
In managing the fund's portfolio, the Adviser will focus on those securities
believed to offer the most attractive value relative to alternative investments.
That is, the Adviser will invest in securities that it believes offer
potentially better yield or total return (the combination of yield and price
appreciation) than securities of comparable rating and maturity. Similarly, the
Adviser will sell securities that it believes no longer offer potentially better
yield or total return than other available securities. This strategy is
generally referred to as a "value" approach and is primarily concerned with
individual security and sector selection. In addition, the Adviser's strategy
does not attempt to forecast interest rate movements; rather the goal is to keep
the fund's assets "fully invested" (hold a minimal amount of cash reserves --
generally less than 10%) and to maintain a relatively stable average effective
portfolio maturity. The policy of the fund is to keep the portfolio's average
effective maturity between 3 and 15 years.
Up to 100% of the fund's total assets may consist of debt securities that are
rated below investment grade and their unrated equivalents (deemed by the
Adviser to be of comparable quality). Types of debt securities include, but are
not limited to, bonds, debentures, notes, mortgage-backed and asset-backed
securities, convertible debt securities of domestic and foreign corporations,
and municipal and foreign government obligations. The fund may invest up to 20%
of its assets in foreign debt and equity securities. Equity securities include
common stock, preferred stock and convertible preferred securities. The fund may
invest up to 35% of its assets in other debt securities including investment
grade securities.
PRINCIPAL RISKS
An investment in the fund is not guaranteed. As with any mutual fund, the value
of the fund's shares will change and you could lose money by investing in the
fund. In addition, the performance of the fund depends on the Adviser's ability
to effectively implement the investment strategies of the fund.
A variety of factors may influence its investment performance, such as:
o BELOW INVESTMENT GRADE BONDS. The fund invests primarily in below
investment grade bonds. These bonds involve a higher degree of credit
risk, which is the risk that the issuer will not make interest or
principal payments when due. In the event of an unanticipated default,
the fund would experience a reduction in its income, a decline in the
market value of the securities so affected and a decline in the value
of its shares. During an economic
5
<PAGE>
downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which could adversely
affect their ability to service principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing. The market prices of below investment grade bonds are
generally less sensitive to interest rate changes than higher-rated
investments, but more sensitive to adverse economic or political
changes, or individual developments specific to the issuer. Periods of
economic or political uncertainty and change can be expected to result
in volatility of prices of these securities. NRSROS consider such bonds
to be speculative in nature.
o BOND MARKET RISK. For bonds, market risk generally reflects credit risk
and interest rate risk. Credit risk is risk that the issuer of the bond
will not pay or is perceived as less likely to pay the interest and
principal payments when due. Bond value typically declines if the
issuer's credit quality deteriorates. Interest rate risk is the risk
that interest rates will rise and the value of bonds, including those
held by the fund, will fall. A broad-based market drop may also cause a
bond's price to fall. Interest rate risk is generally greater the
longer the remaining maturity of the bonds. Prices will usually
decrease more for a longer term bond when interest rates rise.
o PREPAYMENT RISK. During periods of falling interest rates, there is the
risk that a debt security with a high stte interest rate will be
prepaid before its expected maturity rate. This is a risk especially
associated with mortgage and asset backed securities.
o FOREIGN INVESTING RISK. Foreign investing involves risks not typically
associated with U.S. investment. These risks include, among others,
adverse fluctuations in foreign currency values as well as adverse
political, social and economic developments affecting a foreign
country. Investments in foreign countries could be affected by factors
not present in the U.S., such as restrictions on receiving the
investment proceeds from a foreign country, foreign tax laws, and
potential difficulties in enforcing contractual obligations.
Transactions in foreign securities may be subject to less efficient
settlement practices, including extended clearance and settlement
periods. Owning foreign securities could cause the fund's performance
to fluctuate more than if it held only U.S. securities.
o CURRENCY RISK. The values of the fund's shares may change as a result
of changes in exchange rates reducing the value of the U.S. dollar
value of the fund's foreign investments. Currency exchange rates can be
volatile and affected by a number of factors, such as the general
economics of a country, the actions of U.S. and foreign governments or
central banks, the imposition of currency controls, and speculation.
o EQUITY SECURITY RISK. Because the fund can invest in stocks of U.S. and
foreign companies, it is subject to stock market risk. Stock prices
typically fluctuate more than the values of other types of securities
such as U.S. government securities, corporate bonds and preferred
stock, typically in response to changes in the particular company's
financial condition and factors affecting the market in general. For
example, unfavorable or unanticipated poor earnings performance of the
company may result in a decline in its stock's price, and a broad-based
market drop may also cause a stock's price to fall.
6
<PAGE>
FEES AND EXPENSES OF THE HIGH INCOME FUND
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (fees paid directly
from your investment) Class A Class C Class I
- -------------------------------------------------------------------------
Maximum sales charge (Load) 2.50% 0.00% 0.00%
(as a percentage of offering price)
Maximum deferred sales charge (Load) 0.00% 1.00% 0.00%
(as a percentage of the lesser of the
offering price or net asset value)
Maximum sales charge (Load) Imposed None None None
on reinvested dividends and other
distributions
Redemption Fee (as a percentage of None None None
amount redeemed)
Exchange Fee None None None
Maximum Account Fee None None None
ANNUAL FUND EXPENSES (expenses that
are deducted from fund assets) Class A Class C Class I
- --------------------------------------------------------------------------
Management fee 0.75% 0.75% 0.75%
Distribution (12b-1) fees 0.25% 0.75% 0.00%
Other expenses(1) 0.40% 0.40% 0.40%
----------------------------------
Total annual fund operating expenses(2) 1.40% 1.90% 1.15%
==================================
Fee Waiver 0.15% 0.15% 0.15%
==================================
Net Expenses: 1.25% 1.75% 1.00%
(1) Because the fund had no operations prior to March 22, 1999, these expenses
are estimated for its first year of operations.
(2) The Adviser has agreed to waive its fee and to reimburse the fund until
March 22, 2000 to the extent its annual operating expenses (excluding
brokerage, interest, taxes, and extraordinary expenses) exceed 1.25% of
net assets of Class A shares, 1.75% of net assets of Class C shares and
1.00% of net assets of Class I shares.
EXAMPLE
This Example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This Example assumes that you invest $10,000 in the fund and then redeem all of
your shares at the end of the time periods indicated. The Example also assumes
that your investment has a 5% return each year and that the fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
7
<PAGE>
Class A Class C Class I
-------------------------------------------
1 Year $375 $278 $102
1 Year (if shares are not $375 $178 $102
redeemed)
3 Years (whether or not $669 $584 $352
shares redeemed)
8
<PAGE>
YOUR ACCOUNT
BUYING SHARES If you are buying shares through a Morgan Keegan & Company, Inc.
("Morgan Keegan") investment broker, he or she can assist you with all phases of
your investment.
MINIMUM INITIAL INVESTMENT FOR CLASS A AND CLASS C SHARES:
o $1,000
o $250 for Individual Retirement Accounts
MINIMUM ADDITIONAL INVESTMENTS:
o $50 for any account
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To buy shares without the help of a Morgan Keegan investment broker, please use
the instructions on these pages.
CHOOSING A SHARE CLASS
Each fund offers three share classes. Each class has its own expense structure.
Your investment plans will determine which class is most suitable for you. For
example, if you are investing a substantial amount OR if you plan to hold your
shares for a long period, Class A shares may make the most sense for you. If you
are investing for less than five years, you may want to consider Class C shares.
Class I shares are available only to a limited group of investors. If you are
investing through a special program, such as a large employer-sponsored
retirement plan or certain programs available through brokers, you may be
eligible to purchase Class I shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
CLASS COMPARISON
CLASS A -- FRONT LOAD
o Initial sales charge of 2.00% for the Morgan Keegan Intermediate Bond Fund
and 2.50% for the Morgan Keegan High Income Fund (in either case, as a
percentage of offering price which includes the sales load); see schedule
below.
o Lower sales charges for larger investments of $50,000 or more; no sales
charge for purchases of $1 million or more.
o Low or no sales charge for certain wrap-fee programs and other sponsored
arrangements.
o Lower annual expenses than Class C shares due to lower distribution (12b-1)
fee of 0.25%.
o "Right of accumulation" allows you to determine the applicable sales load on
a purchase by including the value of your existing Morgan Keegan Fund
investments as part of your current investment.
o "Letter of intent" allows you to count all investments in this or other
Morgan Keegan Funds over the next 13 months as if you were making them all at
once, for purposes of calculating sales charges.
9
<PAGE>
- ------------------------------------------------------------------------------
Morgan Keegan Intermediate Bond Fund
- ------------------------------------------------------------------------------
Class A Sales Charge
- ------------------------------------------------------------------------------
As a % of net
Your investment As a % of offering price amount invested
- ------------------------------------------------------------------------------
up to $49,999 2.00% 2.04%
$50,000 to $99,999 1.75% 1.78%
$100,000 to $249,999 1.50% 1.52%
$250,000 to $499,999 1.00% 1.01%
$500,000 to $999,999 0.75% 0.76%
$1 million and over 0.00% 0.00%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Morgan Keegan High Income Fund
- ------------------------------------------------------------------------------
Class A Sales Charge
As a % of net
Your investment As a % of offering price amount invested
- ------------------------------------------------------------------------------
up to $49,999 2.50% 2.56%
$50,000 to $99,999 2.25% 2.30%
$100,000 to $249,999 1.75% 1.78%
$250,000 to $499,999 1.25% 1.27%
$500,000 to $999,999 1.00% 1.01%
$1 million and over 0.00% 0.00%
- ------------------------------------------------------------------------------
CLASS C -- LEVEL LOAD
o No initial sales charge.
o Deferred sales charge of 1% of the lesser of the purchase price of the shares
or their net asset value at the time of redemption, payable by you if you
sell shares within one year of purchase. In the event of a partial
redemption, the deferred sales charge will be applied to the oldest shares
held first.
o Annual distribution (12b-1) fee of 0.60% for the Morgan Keegan Intermediate
Bond Fund and 0.75% for the Morgan Keegan High Income Fund.
CLASS I -- NO LOAD
o No sales charges of any kind.
o No distribution (12b-1) fees; annual expenses are lower than other share
classes.
o Available only to certain retirement accounts, advisory accounts of the
investment manager and broker special programs, including broker programs
with record-keeping and other services; these programs usually involve
special conditions and separate fees (contact your financial professional for
information).
10
<PAGE>
POLICIES FOR BUYING SHARES
Once you have chosen a share class, complete the enclosed application. You can
avoid future inconvenience by signing up now for any services you might later
use.
TIMING OF REQUESTS. All requests received by the close of the New York Stock
Exchange ("NYSE") (normally 4:00 p.m. eastern time) will be executed the same
day, at that day's closing share price. Orders received after the closing of the
NYSE will be executed the following day, at that day's closing share price. To
purchase shares at the next computed net asset value an investor must submit an
order to Morgan Keegan by completing the enclosed purchase application and
sending it along with a check to Morgan Keegan at the address listed in the
application or through a pre-authorized check or transfer plan offered by other
financial institutions.
PURCHASES BY CHECK. Complete the enclosed purchase application. Forward your
application, with all appropriate sections completed, along with a check for
your initial investment payable to your Morgan Keegan investment broker or
Morgan Keegan at 50 North Front Street, Memphis, TN 38103.
Call your Morgan Keegan investment broker or Morgan Keegan at 800-366-7426 or
visit our Web site at www.morgankeegan.com.
TO ADD TO AN ACCOUNT
BY PHONE Contact Morgan Keegan at 800-366-7426.
BY CHECK Fill out the investment stub from an account statement, or indicate the
fund name and share class on your check. Make checks payable to "Morgan Keegan."
Mail the check and stub to Morgan Keegan at 50 North Front Street, Memphis, TN
38103.
SYSTEMATIC INVESTMENT Call Morgan Keegan to verify that systematic investment is
in place on your account, or to request a form to add it.
Investments are automatic once this is in place.
Call your Morgan Keegan investment broker or Morgan Keegan at 800-366-7426 or
visit our Web site at www.morgankeegan.com.
BUYING SHARES THROUGH AN INVESTMENT BROKER
BY MAIL Send a completed purchase application to Morgan Keegan at the address at
the bottom of this page. Specify the fund, the share class, the account number
and the dollar value or number, if any, of shares. Be sure to include any
necessary signatures and any additional documents.
BY TELEPHONE As long as the transaction does not require a written request, you
or your investment broker can buy shares by calling Morgan Keegan at
800-366-7426. A confirmation will be mailed to you promptly. Purchase requests,
where the investor making the request does not currently have an account with
Morgan Keegan, must be made by written application and be accompanied by a check
to Morgan Keegan.
BY EXCHANGE.Read the prospectus for the fund into which you are exchanging. Call
Morgan Keegan at 800-366-7426 or visit our Web site at www.morgankeegan.com. All
exchanges will be made by telephone.
BY SYSTEMATIC INVESTMENT See plan information on page 14.
MORGAN KEEGAN & CO., INC.
50 North Front Street, Memphis, TN 38103
Call toll-free: 1-800-366-7426
(8:30 a.m. - 4:30 p.m., business days, central time)
11
<PAGE>
INTERNET
www.morgankeegan.com
SELLING SHARES
POLICIES FOR SELLING SHARES
CIRCUMSTANCES THAT REQUIRE WRITTEN REQUESTS Please submit instructions in
writing when any of the following apply:
o You are selling more than $100,000 worth of shares
o The name or address on the account has changed within the last 30 days
o You want the proceeds to go to a name or address not on the account
registration
o You are transferring shares to an account with a different registration or
share class
o You are selling shares held in a corporate or fiduciary account; for these
accounts additional documents are required
CORPORATE ACCOUNTS: certified copy of a corporate resolution
FIDUCIARY ACCOUNTS: copy of power of attorney or other governing document
To protect your account against fraud, all written requests must bear signature
guarantees. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
TIMING OF REQUESTS All requests received by Morgan Keegan before the close of
the NYSE (normally 4:00 p.m. eastern time) will be executed the same day, at
that day's closing price. Requests received after the close of the NYSE will be
executed the following day, at that day's closing share price.
SELLING RECENTLY PURCHASED SHARES If you sell shares before the payment for
those shares has been collected, you will not receive the proceeds until your
initial payment has cleared. This may take up to 15 days after your purchase
date. Any delay would occur only when it cannot be determined that payment has
cleared.
TO SELL SOME OR ALL OF YOUR SHARES
THROUGH AN INVESTMENT BROKER
BY MAIL Send a letter of instruction, an endorsed stock power or share
certificates (if you hold certificate shares) to Morgan Keegan at the address at
the bottom of this page. Specify the fund, the share class, the account number
and the dollar value or number of shares. Be sure to include any necessary
signatures and any additional documents.
BY TELEPHONE As long as the transaction does not require a written request (see
facing page), you or your financial professional can sell shares by calling
Morgan Keegan at 800-366-7426. A check will be mailed to you on the following
business day.
BY EXCHANGE Read the prospectus for the fund into which you are exchanging. Call
Morgan Keegan at 800-366-7426 or visit our Web site at www.morgankeegan.com. All
exchanges may be made by telephone and mail.
BY SYSTEMATIC WITHDRAWAL See plan information on page 14.
12
<PAGE>
MORGAN KEEGAN & CO., INC.
50 North Front Street
Memphis, TN 38103
Call toll-free: 1-800-366-7426
(8:30 a.m. - 4:30 p.m., business days, central time)
INTERNET
www.morgankeegan.com
ACCOUNT POLICIES
THE FUNDS' BUSINESS HOURS The funds are open the same days as the NYSE
(generally Monday through Friday). Representatives of the funds are available
normally from 8:30 a.m. to 4:30 p.m. central time on these days.
CALCULATING SHARE PRICE The offering price of a share is its net asset value
plus a sales charge, if applicable. Each fund calculates net asset value (NAV)
every business day at the close of regular trading on the NYSE (usually 4:00
p.m. eastern time) by subtracting the liabilities attributable to shares from
the total assets attributable to such shares and dividing the result by the
number of shares outstanding. Investments in securities traded on national
securities exchange are stated at the last reported sales price on the day of
valuation. Securities traded in the over-the-counter market and listed
securities for which no sale was reported on that date are stated at the last
quoted bid price. The fund normally obtains market values for its securities
from independent pricing services that use computerized "matrix" systems that
derive value based on comparable securities. Debt securities with remaining
maturities of 60 days or less are valued at amortized cost, or original cost
plus accrued interest, both of which approximate market. When the funds believe
that a market quote does not reflect a security's true value, the funds may
substitute for the market quote a fair value estimate made according to methods
approved by the Board of Directors. Because foreign markets may be open on days
when U.S. markets are closed, the value of foreign securities could change on
days when you can't buy or sell fund shares.
TELEPHONE REQUESTS When you open an account you automatically receive telephone
privileges, allowing you to place requests on your account by telephone. Your
investment broker can also use these privileges to request exchanges on your
account, and with your written permission, redemptions.
As long as Morgan Keegan takes certain measures to authenticate telephone
requests on your account, you may be held responsible for unauthorized requests.
Unauthorized telephone requests are rare, but if you want to protect yourself
completely, you can decline the telephone privilege on your application. The
funds may suspend or eliminate the telephone privilege at any time. The funds
will provide 7 days' prior written notice before suspending or eliminating
telephone privileges.
EXCHANGE PRIVILEGES There is no fee to exchange shares between the funds or to
exchange Class A shares of either fund for shares of Morgan Keegan Southern
Capital Fund. Your new fund shares will be the same class as your current
shares. Any contingent deferred sales charges will continue to be calculated
from the date of your initial investment.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the funds currently limit each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The funds may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request. The funds will provide 60 days' prior written notice
before materially amending, suspending or eliminating exchange privileges.
13
<PAGE>
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $500, due to
exchanges and redemption, Morgan Keegan may mail you a notice asking you to
bring the account back up to $500 or close it out. If you do not take action
within 60 days, Morgan Keegan may sell your shares and mail the proceeds to you
at the address of record.
REINSTATING RECENTLY SOLD SHARES For 120 days after you sell Class A shares, you
have the right to "reinstate" your investment by putting some or all of the
proceeds into Class A Shares of either fund or the Morgan Keegan Southern
Capital Fund at net asset value, without payment of a sales charge.
ADDITIONAL POLICIES
Please note that the funds maintain additional policies and reserve certain
rights, including:
Class A shares may be acquired without a sales charge if the purchase is made
through a Morgan Keegan representative who formerly was employed as a broker
with another firm registered as a broker-dealer with the Securities and Exchange
Commission, if the following conditions are met: (1) the purchaser was a client
of the investment executive at the other firm for which the investment executive
previously served as a broker; (2) within 90 days of the purchase of the fund's
shares, the purchaser redeemed shares of one or more mutual funds for which that
other firm or its affiliates served as principal underwriter, provided that
either the purchaser had paid a sales charge in connection with investment in
such funds or a contingent deferred sales charge upon redeeming shares in such
funds; and (3) the aggregate amount of the fund's shares purchased pursuant to
this sales charge waiver does not exceed the amount of the purchaser's
redemption proceeds from the shares of the mutual fund(s) for which the other
firm or its affiliates served as principal underwriter. In addition, Class A
shares may be acquired without a sales charge if a purchase is made with the
proceeds of a redemption of other fixed income mutual fund shares, provided that
the purchaser paid a sales charge in connection with purchasing or redeeming
these shares and further provided that the purchase of the Class A shares of the
fund is made within 30 days of a redemption.
The funds may vary their initial or additional investment levels in the case of
exchanges, reinvestments, periodic investment plans, retirement and employee
benefit plans, sponsored arrangements and other similar programs.
At any time, the funds may change or discontinue its sales charge waivers and
any of its order acceptance practices, and may suspend the sale of its shares.
To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to Morgan Keegan promptly.
Dealers may impose a transaction fee on the purchase or sale of shares by
shareholders.
INVESTOR SERVICES
SYSTEMATIC INVESTMENT PROGRAM (SIP) Use SIP to set up regular automatic
investments in a fund from your bank account. You determine the frequency and
the amount of your investments, and you can skip an investment with three days'
notice. Not available with Class I shares.
SYSTEMATIC WITHDRAWAL PLAN This plan is designated for retirees and other
investors who want regular withdrawals from a fund account. Certain terms and
minimums apply.
DIVIDEND ALLOCATION PLAN This plan automatically invests your distributions from
the fund into another fund of your choice, without any fees or sales charges.
14
<PAGE>
AUTOMATIC BANK CONNECTION This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
AUTOMATED INVESTMENTS OR WITHDRAWALS Set up regular investments or withdrawals
to suit your needs and let Morgan Keegan do the work for you.
MOVE MONEY BY PHONE Designate this on your application and you can move money
between your bank account and your Morgan Keegan account with a phone call.
DIVIDEND REINVESTMENT Have your dividends automatically reinvested at no sales
charge.
EXCHANGES. It's easy to move money from one fund to the other or to the Morgan
Keegan Southern Capital Fund, with no exchange fees. (Exchange privilege may be
changed or discontinued at any time.) Call 800-366-7426 or visit our Web site at
www.morgankeegan.com.
OPENING a regular investment or a tax-deferred retirement account at Morgan
Keegan is easy. Your investment broker can help you determine if this fund is
right for you. He or she is trained to understand investments and can help speed
the application process.
TAKE ADVANTAGE of everything your investment broker and Morgan Keegan have to
offer. The services described on this page can make investing easy for you. And
your investment broker can be a valuable source of guidance and additional
services, for planning your investments and for keeping them on track with your
goals.
Morgan Keegan also offers a full range of prototype retirement plans for
individuals, sole proprietors, partnerships, corporations and employees. Call
800-366-7426 for information on retirement plans or any of the services
described above.
FUNDS' MANAGEMENT AND INVESTMENT ADVISER
The funds are managed by Morgan Asset Management, Inc. (the "Adviser"), 50 North
Front Street, Memphis, TN 38103. Pursuant to an advisory agreement (the
"Advisory Agreement"), the Adviser is responsible for the investment management
of the funds, including responsibility for making investment decisions and
placing orders to buy, sell or hold a particular security. Morgan Keegan
Intermediate Bond Fund pays the Adviser an advisory fee equal to an annual rate
of 0.40% of its average daily net assets; and Morgan Keegan High Income Fund
pays the Adviser an advisory fee equal to an annual rate of 0.75% of its average
daily net assets. Founded in 1986, the Adviser is a wholly owned subsidiary of
Morgan Keegan, Inc. The Adviser has, as of September 30, 1999, more than $1
billion in total assets under management.
FUNDS' PORTFOLIO MANAGER
James C. Kelsoe, CFA, is the Chief Fixed Income Investment Officer of the
Adviser, a position he has held since 1991. He joined Morgan Keegan in 1991 and
has been in the investment business since 1986.
FUNDS' DISTRIBUTOR
Morgan Keegan & Company, Inc., one of the nation's largest independent regional
financial services firms, acts as the distributor of the funds' shares. It also
is a wholly owned subsidiary of Morgan Keegan, Inc. Each fund has adopted a plan
under Rule 12b-1 that allows the funds to pay distribution fees for the sale and
distribution of the Class A and C shares and for shareholder servicing; and
because these fees are paid out of each fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
15
<PAGE>
DISTRIBUTIONS
INCOME AND CAPITAL GAIN DISTRIBUTIONS. Each fund distributes its net investment
income and net capital gain to shareholders. Using projections of its future
income, each fund declares dividends daily and pays them monthly.
Net capital gains, if any, are distributed annually.
You may have your distributions reinvested in shares of the fund you own or
credited to your brokerage account or mailed out by check. If you do not give
Morgan Keegan other instructions, your distributions will automatically be
reinvested in shares of the fund you own.
TAX CONSIDERATIONS
TAX EFFECTS OF DISTRIBUTIONS AND TRANSACTIONS. Every year, the funds will send
you information detailing the amount of dividends and net capital gain
distributed to you for the previous year. In general, any dividends and net
short-term capital gain distributions you receive from the funds are taxable as
ordinary income. Distributions of other capital gains are generally taxable as
long-term capital gains. This is true no matter how long you have owned your
shares and whether you reinvest your distributions or take them in cash.
Every year, your fund will send you information detailing the amount of
dividends and net capital gain distributed to you for the previous year.
The sale of shares in your account may produce a gain or loss and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Unless your investment is in a tax-deferred account, you may want to avoid:
o Investing a large amount in a fund close to a capital gains distribution
payment date (if a fund makes a capital gain distribution, you will receive
some of your investment back as a taxable distribution), or
o Selling shares of a fund at a loss for tax purposes and reinvesting in shares
of that fund 30 days before or after that sale (such a transaction is usually
considered a "wash sale," and you will not be allowed to deduct all or part
of the tax loss).
Your investment in the funds could have additional tax consequences. Please
consult your tax professional for assistance.
BACKUP WITHHOLDING By law, the funds must withhold 31% of your distributions and
redemption proceeds if you have not provided complete, correct taxpayer
information and 31% of your distributions if you are otherwise subject to backup
withholding.
MORE ABOUT RISK
OTHER SECURITIES AND RISKS
Each of the funds' portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the funds' descriptions. Below are brief descriptions of other
securities and practices, along with their associated risks.
INTERMEDIATE TERM MATURITY BONDS Bonds (debt) that have average maturities
generally ranging from 1 to 10 years. These bonds normally offer higher yields
but less price stability than short term bonds and offer greater price stability
but lower yield than long term bonds.
16
<PAGE>
INVESTMENT GRADE BONDS Bonds that are rated in the top four credit categories by
at least one NRSRO at the time of purchase or, if not rated, that are considered
by the Adviser to be of comparable quality. Investment grade bonds are
considered less risky than bonds whose ratings are below investment grade;
ratings are no guarantee of quality.
TEMPORARY INVESTMENTS For liquidity and flexibility, each fund may invest in
investment grade, short term securities. In unusual market conditions, each fund
may invest more assets in these securities temporarily as a defensive tactic. To
the extent a fund uses this strategy, it may not achieve its investment
objectives.
YEAR 2000 ISSUES Like other mutual funds, the funds could be affected by
problems relating to the ability of computer systems to recognize the year 2000.
The funds are taking steps to ensure that their computer systems are compliant
with Year 2000 issues and to determine that the systems used by their major
service providers are also compliant. Issuers whose securities are held in the
funds' portfolios may also be adversely affected by the Year 2000 issue. At the
same time, it is impossible to know whether these problems, which could disrupt
the funds' operations and investments if uncorrected, have been adequately
addressed until the date in question arrives.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the funds
financial performance as of June 30, 1999. Certain information reflects
financial results for a single fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the funds (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the funds' financial statement, is included in the funds' Annual
Report to Shareholders. Annual Reports may be obtained without charge by calling
1-800-366-7426.
<TABLE>
<CAPTION>
MORGAN KEEGAN MORGAN KEEGAN
INTERMEDIATE HIGH INCOME
BOND FUND BOND FUND
-------------------------------------- --------------------------------------------
CLASS A CLASS C CLASS I CLASS A CLASS C CLASS I
-------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.16 0.15 0.16 0.20 0.18 0.20
Net Gains on Securities (0.15) (0.15) (0.15) 0.17 0.18 0.18
--------- --------- --------- --------- --------- ---------
Total from Investment 0.01 0.00 0.01 0.37 0.36 0.38
Operations
LESS DISTRIBUTIONS
Dividends (from net (0.16) (0.15) (0.16) (0.20) (0.18) (0.20)
investment income)
Net Asset Value, end
of period 9.85 9.85 9.85 10.17 10.18 10.18
Total Return* 0.06% -0.04% 0.13% 3.69% 3.64% 3.85%
RATIOS/SUPPLEMENTAL DATA
Net Assets, end of
period $3,164,863 $1,986,591 $1,068,933 $1,028,584 $4,064,710 $931,780
Expenses to Average
Net Assets 0.90% 1.25% 0.65% 1.25% 1.75% 1.00%
Net Investment Income
to Average Net Assets 6.48% 6.22% 6.82% 8.74% 8.65% 9.40%
Portfolio Turnover Rate 6.66% 6.66% 6.66% 0% 0% 0%
</TABLE>
* Total return does not include front end sales load.
18
<PAGE>
MORGAN KEEGAN SELECT FUND, INC.
ACCOUNT APPLICATION
Do not use this Application for IRA or Keogh Plans.
For special forms or if you need assistance completing this Application,
Please call your Morgan Keegan broker or Morgan Keegan at 1-800-366-7426.
Please print all items except signatures.
Please use blue or black ink only.
1. FUND CHOICE
___ Morgan Keegan Intermediate Bond Fund
___ Class A
___ Class C
___ Class I
___ Morgan Keegan High Income Fund
___ Class A
___ Class C
___ Class I
If you choose to invest in both funds initially, please also indicate the total
purchase amount and how you wish to have your initial investment split among the
funds.
$ __________________ to the Morgan Keegan Intermediate Bond Fund.
$____________________ to the Morgan Keegan High Income Fund
2. ACCOUNT REGISTRATION (PLEASE CHOOSE ONE)
---- Individual or Joint Account*
/ /
- ----
- ------------------------------------------------------------------------------
Owner's name (first, middle initial, last)
and
- ------------------------------------------------------------------------------
Joint owner's name (first, middle initial, last)
*Joint tenancy with right of survivorship presumed, unless otherwise
indicated.
19
<PAGE>
<TABLE>
<CAPTION>
OR
/ / UNIFORM GIFTS/TRANSFERS TO MINORS (UGMA/UTMA)
<S> <C>
_________________________________________________________________________as custodian for
Custodian's name (first, middle initial, last - one custodian only)
_________________________________________________________________________Minor's
name (first, middle initial, last - one minor only)
_______________________________________________________Uniform Gifts/Transfers to Minor Act
State
- -----/------/------
Minor's date of birth
OR
/ / TRUST
__________________________________________________________________________As trustee(s) of
Trustee(s) name
________________________________________________________________________for the benefit of
Name of trust agreement dated
- ------------------------------------------------------------------------------
Beneficiary's name (if applicable) Date of trust agreement
For Trust Accounts, a Multi-Purpose Certification form may be required to
authorize redemptions and add privileges. Please call your Morgan Keegan broker
or Morgan Keegan Fund Services at 1-800-366-7426 to determine if a Multi-Purpose
Certification Form is required.
OR
/ / CORPORATION, PARTNERSHIP, ESTATE OR OTHER ENTITY
- ------------------------------------------------------------------------------
Name of Corporation, Partnership, Estate or Other Entity
- ------------------------------------------------------------------------------
Type of Entity
For Corporation, Partnership, Estate or other Entities, a Multi-Purpose
Certification Form is required to authorize redemptions and add privileges. If
you have any questions please call your Morgan Keegan broker or Morgan Keegan
Fund Services at 1-800-366-7426.
3. ADDRESS
- ------------------------------------------------------------------------------
Street or P.O. Box Apt. No.
</TABLE>
20
<PAGE>
- ------------------------------------------------------------------------------
City State Zip Code
( ) ( )
- ------------------------------------------------------------------------------
Daytime phone number Evening phone number
If you are not a citizen or resident alien of the U.S., please specify country
of permanent residence.
- ------------------------------------------------------------------------------
Country of permanent residence
4. SOCIAL SECURITY NUMBER OR OTHER TAXPAYER IDENTIFICATION NUMBER
[-----] [-----] [-----] [-----] [-----] [-----] [-----] [-----] [-----]
o INDIVIDUAL ACCOUNTS Specify the Social Security number of the owner.
o *JOINT ACCOUNTS Specify the Social Security number of the first named owner.
o UNIFORM GIFTS/TRANSFERS TO MINORS ACCOUNTS Specify the minor's Social
Security number.
o CORPORATIONS, PARTNERSHIPS, ESTATES, OTHER ENTITIES OR TRUST ACCOUNTS Specify
the Taxpayer Identification Number of the legal entity or organization that
will report income and/or gains resulting from your investments in the fund.
*In ADDITION to the above, Joint accounts must ALSO specify the Social Security
number of the second named owner here.
[-----] [-----] [-----] [-----] [-----] [-----] [-----] [-----] [-----]
5. INVESTMENT METHOD (MINIMUM INVESTMENT: $1,000)
/ / CHECK
Enclosed is a check payable to Morgan Keegan. (Neither initial nor subsequent
investments should be made by third party check.)
FOR $
- --------------------------------------------------------------------------------
Amount
6. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
CHECK ONE ONLY. IF YOU DO NO CHECK ONE OF THE FOLLOWING OPTIONS, ALL DIVIDENDS
AND CAPITAL GAIN DISTRIBUTIONS WILL BE REINVESTED.
___ Reinvest all dividends and capital gain distributions.
___ Pay all dividends and capital gain distributions by check.
___ Pay all dividends by check and reinvest all capital gain distributions.
7. SYSTEMATIC INVESTMENT PLAN (SIP)
PERMITS YOU TO PURCHASE SHARES AUTOMATICALLY ON A REGULAR BASIS BY
ELECTRONICALLY TRANSFERRING A SPECIFIED DOLLAR AMOUNT FROM YOUR BANK ACCOUNT TO
YOUR MORGAN KEEGAN FUNDS MUTUAL FUND ACCOUNT.
21
<PAGE>
___ Yes, I (we) want the Morgan Funds Systematic Investment Plan (SIP)
You must attach a voided check to this Application. Money will be transferred
only from the bank account indicated on the voided check.
Check the day of the month most convenient for you to have your bank account
debited. You can invest once or twice a month ($250 minimum investment(s).
___ 1st ___ 15th ___ both dates
Amount you would like to invest each time: $______________
<TABLE>
<CAPTION>
8. TELEPHONE PRIVILEGES
TELEPHONE REDEMPTION permits redemption proceeds paid by check, payable to your
account's registration and mailed to your account's address.
TELEPHONE EXCHANGE permits exchanges by telephone among certain Morgan Keegan
Funds and the Morgan Keegan Southern Capital Fund with the same registration.
<S> <C>
Please check one: I (we) do ___, do not ____ want the TELEPHONE REDEMPTION privilege.
Please check one: I (we) do ___, do not ____ want the TELEPHONE EXCHANGE privilege.
9. OPTIONAL INFORMATION (we are required by the National Association of
Securities Dealers, Inc. to request this information).
- ------------------------------------------------------------------------------
Owner's occupation Owner's date of birth
- ------------------------------------------------------------------------------
Owner's employer's name
- ------------------------------------------------------------------------------
Owner's employer's address
- ------------------------------------------------------------------------------
Joint owner's occupation Joint owner's date of birth
- ------------------------------------------------------------------------------
Joint owner's employer's name
- ------------------------------------------------------------------------------
Joint owner's employer's address
10. SIGNATURE
By signing below, you certify and agree that:
You have received a current Fund Prospectus and agree to its terms. It is your
responsibility to read the Prospectus of any Fund into which you may exchange.
You have full authority and are of legal age to buy and redeem shares
(custodians certify they are duly authorized to act on behalf of the investors).
22
<PAGE>
The Fund's Transfer Agent, Morgan Keegan, Morgan Keegan Select Fund, Inc.,
Morgan Keegan Southern Capital Fund, Inc., Morgan Asset Management, Inc., any
affiliate and/or any of their directors, trustees, employees and agents will not
be liable for any claims, losses or expenses (including legal fees) for acting
on any instructions or inquiries reasonably believed to be genuine.
You understand that mutual fund shares are not deposits or obligations of, or
guaranteed by, any bank, the U.S. Government or its Agencies, and are not
Federally Insured by the Federal Deposit Insurance Corporation, The Federal
Reserve Board or any other Agency.
The net asset value of funds of this type will fluctuate from time to time.
Taxpayer Identification Number Certification
The IRS requires all taxpayers to write their Social Security number or other
Taxpayer Identification Number in Section 4 of this Application and sign this
Certification. Failure by a non-exempt taxpayer to give us the correct Social
Security number or Taxpayer Identification Number will result in the withholding
of 31% of all taxable dividends and other distributions paid to your account and
proceeds from redemptions of your shares (referred to as "backup withholding").
Understanding penalties of perjury, you certify that:
(1) The Social Security Number or other Taxpayer Identification Number on this
Application is correct; and (2) you are not subject to backup withholding
because (a) you are exempt from backup withholding; (b) you have not been
notified by the Internal Revenue Service that you are subject to backup
withholding; or (c) the IRS has notified you that you are no longer subject to
backup withholding.
Cross out item 2 above if it does not apply to you.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF
THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO AVOID BACKUP
WITHHOLDING.
PLEASE SIGN HERE:
X____________________________________________________________________________________
Owner or Custodian
Joint owner (if any), Corporate officer, Partner, Trustee, etc.
Date Title
Mailing Instructions
Please mail the application to:
Your Morgan Keegan broker.
Or
Morgan Keegan Select Fund, Inc.
50 North Front Street
Memphis, TN 38103
THIS APPLICATION MUST BE FILED WITH THE TRANSFER AGENT BEFORE ANY REDEMPTION
REQUEST CAN BE HONORED.
23
<PAGE>
YOU WILL RECEIVE A CONFIRMATION SHOWING YOUR FUND ACCOUNT NUMBER, DOLLAR AMOUNT
RECEIVED, SHARES PURCHASED AND PRICE PAID PER SHARE.
Please do not complete
Account Number _____________________________ Rep Number_________________
</TABLE>
24
<PAGE>
FOR ADDITIONAL INFORMATION
A Statement of Additional Information ("SAI"), dated November 1, 1999,
containing further information about the funds has been filed with the
Securities and Exchange Commission ("SEC") and, as amended or supplemented from
time to time, is incorporated by reference in this prospectus.
Additional information about the funds' investments is available in the funds'
annual and semi-annual reports to shareholders. In the funds' annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the funds' performance.
Free copies of the annual and semi-annual reports and SAI may be obtained:
o from your Morgan Keegan investment broker;
o by calling Morgan Keegan at 800-366-7426;
o by writing to Morgan Keegan at the address noted below; or
o by accessing the Web site maintained by the SEC (http://www.sec.gov).
Information about the funds (including the SAI) also can be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C. (call 800-SEC-0330 for
further information), or may be obtained upon payment of a duplicating fee by
writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
All shareholder inquiries can be made by contacting Morgan Keegan at the address
listed below:
Morgan Keegan & Company, Inc.
50 North Front Street
Memphis, TN 38103
1-800-366-7426
Investment Company Act File No. 811-09079.
25
<PAGE>
MORGAN KEEGAN SELECT FUND, INC.
Morgan Keegan Intermediate Bond Fund
Morgan Keegan High Income Fund
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
(800) 366-7426
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
This Statement of Additional Information ("SAI") is not a prospectus and
should be read in conjunction with the funds' Prospectus, dated November 1,
1999, which has been filed with the Securities and Exchange Commission ("SEC").
A copy of the current Prospectus is available without charge from Morgan Keegan
& Company, Inc. ("Morgan Keegan"), the distributor of the funds by writing to
the above address or by calling the toll-free number listed above.
--------------------------------------
November 1, 1999
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION..........................................................1
INVESTMENT LIMITATIONS AND POLICIES..........................................1
ADDITIONAL TAX INFORMATION..................................................19
General...................................................................19
Dividends and Other Distributions.........................................20
Redemptions...............................................................20
Income from Foreign Securities............................................21
Hedging Strategies........................................................22
Original Issue Discount Securities........................................23
ADDITIONAL INFORMATION ON REDEMPTIONS.......................................23
VALUATION OF SHARES.........................................................24
PURCHASE OF SHARES..........................................................25
Class A Shares............................................................25
Class C Shares............................................................25
Class I Shares............................................................25
PERFORMANCE INFORMATION.....................................................26
Total Return Calculations.................................................26
Other Information.........................................................27
TAX-DEFERRED RETIREMENT PLANS...............................................28
Individual Retirement Accounts - IRAs.....................................28
Self-Employed Individual Retirement Plans - Keogh Plans...................28
Simplified Employee Pension Plans - SEPPS and Savings Incentive Match Plans
for Employees - SIMPLES...................................................29
DIRECTORS AND OFFICERS......................................................29
TABLE OF COMPENSATION.......................................................30
INVESTMENT ADVISER..........................................................31
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................32
DISTRIBUTOR.................................................................33
DESCRIPTION OF THE FUNDS'SHARES.............................................35
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING
SERVICE AGENT...............................................................36
LEGAL COUNSEL...............................................................36
CERTIFIED PUBLIC ACCOUNTANTS................................................36
Dated: November 1, 1999
<PAGE>
GENERAL INFORMATION
The Morgan Keegan Select Fund, Inc., is an open-end investment management
company (the "Company") organized as a Maryland corporation on October 27, 1998.
The Morgan Keegan Intermediate Bond Fund ("Intermediate Fund") and the Morgan
Keegan High Income Fund ("High Income Fund") are diversified series of the
Company. Each fund has its own investment objective and policies as described in
the funds' Prospectus. Each fund offers three classes of shares: Class A shares,
Class C shares and Class I shares.
INVESTMENT LIMITATIONS AND POLICIES
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of a fund's assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined at the time of a
fund's acquisition of such security or other asset. Accordingly, any subsequent
change in values, net assets, or other circumstances will not be considered when
determining whether the investment complies with the fund's investment policies
and limitations.
Each fund's fundamental investment policies and limitations cannot be
changed without approval by a "majority of the outstanding voting securities"
(as defined in the Investment Company Act of 1940 ("1940 Act")) of the fund.
However, except for the fundamental investment limitations listed below, the
investment policies and limitations described in this SAI are not fundamental
and may be changed without shareholder approval.
INVESTMENT LIMITATIONS OF THE FUNDS
THE FOLLOWING ARE THE FUNDS' FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH
IN THEIR ENTIRETY. EACH FUND MAY NOT:
(1) issue senior securities, except as permitted under the 1940 Act;
(2) borrow money, except that the fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not exceeding
33 1/3% of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed this amount will be
reduced within three days (not including Sundays and holidays) to the extent
necessary to comply with the 33 1/3% limitation;
(3) underwrite securities issued by others, except to the extent that
the fund may be considered an underwriter within the meaning of the Securities
Act of 1933 ("1933 Act") in the disposition of restricted securities;
(4) purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, 25% or more of the fund's total assets would
be invested in the securities of companies whose principal business activities
are in the same industry;
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(5) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
fund from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
(6) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities);
(7) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or to repurchase agreements; or
(8) with respect to 75% of the fund's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities) if, as a result, (a)
more than 5% of the fund's total assets would be invested in the securities of
that issuer, or (b) the fund would hold more than 10% of the outstanding voting
securities of that issuer.
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE
CHANGED BY THE BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL. EACH FUND:
(1) may not sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short,
and provided that transactions in futures contracts and options are not deemed
to constitute selling securities short;
(2) may not purchase securities on margin, except that a fund may obtain
such short-term credits as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures contracts and options
on futures contracts shall not constitute purchasing securities on margin;
(3) may not purchase securities when borrowings exceed 5% of its
total assets;
(4) may borrow money only (a) from a bank, or (b) by engaging in reverse
repurchase agreements with any party (reverse repurchase agreements are treated
as borrowings for purposes of fundamental investment limitation (2)); and
(5) may not purchase any security if, as a result, more than 15% of its
net assets would be invested in securities that are illiquid because they are
subject to legal or contractual restrictions on resale or because they cannot be
sold or disposed of in the ordinary course of business at approximately the
prices at which they are valued.
With respect to limitation (5), if through a change in values, net assets,
or other circumstances, a fund were in a position where more than 15% of its net
assets was invested in illiquid securities, it would consider appropriate steps
to protect liquidity.
The following pages contain more detailed information about types of
instruments in which each fund may invest, strategies the Adviser may employ in
pursuit of each fund's investment objective, and a summary of related risks. The
Adviser may not buy all of these instruments or use all of these techniques
unless it believes that doing so will help the funds achieve their goals.
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ASSET-BACKED SECURITIES represent interests in pools of mortgages, loans,
receivables or other assets. Payment of interest and repayment of principal may
be largely dependent upon the cash flows generated by the assets backing the
securities and, in certain cases, supported by letters of credit, surety bonds,
or other credit enhancements. Asset-backed security values may also be affected
by the creditworthiness of the servicing agent for the pool, the originator of
the loans or receivables, or the entities providing the credit enhancement. In
addition, these securities may be subject to prepayment risk.
MORTGAGE-BACKED SECURITIES are issued by government and non-government
entities such as banks, mortgage lenders, or other institutions. A
mortgage-backed security is an obligation of the issuer backed by a mortgage or
pool of mortgages or a direct interest in an underlying pool of mortgages. Some
mortgage-backed securities, such as collateralized mortgage obligations
("CMOs"), make payments of both principal and interest at a range of specified
intervals; others make semiannual interest payments at a predetermined rate and
repay principal at maturity (like a typical bond). Mortgage-backed securities
are based on different types of mortgages, including those on commercial real
estate or residential properties. Stripped mortgage-backed securities are
created when the interest and principal components of a mortgage-backed security
are separated and sold as individual securities. In the case of a stripped
mortgage-backed security, the holder of the "principal-only" security receives
the principal payments made by the underlying mortgage, while the holder of the
"interest-only" security receives interest payments from the same underlying
mortgage.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers and changes in interest rates. In addition,
regulatory or tax changes may adversely affect the mortgage-backed securities
market as a whole. Non-government mortgage-backed securities may offer higher
yields than those issued by government entities, but also may be subject to
greater price changes than government issues. Mortgage-backed securities are
subject to prepayment risk, which is the risk that early principal payments made
on the underlying mortgages, usually in response to a reduction in interest
rates, will result in the return of principal to the investor, causing it to be
invested subsequently at a lower current interest rate. Alternatively, in a
rising interest rate environment, mortgage-backed security values may be
adversely affected when prepayments on underlying mortgages do not occur as
anticipated, resulting in the extension of the security's effective maturity and
the related increase in interest rate sensitivity of a longer-term instrument.
The prices of stripped mortgage-backed securities tend to be more volatile in
response to changes in interest rates than those of non-stripped mortgage-backed
securities.
CLOSED-END INVESTMENT COMPANIES are investment companies that issue a
fixed number of shares, which trade on a stock exchange or over-the-counter.
Closed-end investment companies are professionally managed and may invest in any
type of security. Shares of closed-end investment companies may trade at a
premium or a discount to their net asset value.
CONVERTIBLE SECURITIES are bonds, debentures, notes, preferred stocks or
other securities that may be converted or exchanged (by the holder or by the
issuer) into shares of the underlying common stock (or cash or securities of
equivalent value) at a stated exchange ratio. A convertible security may also be
called for redemption or conversion by the issuer after a particular date and
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under certain circumstances (including a specified price) established upon
issue. If a convertible security held by a fund is called for redemption or
conversion, the fund could be required to tender it for redemption, convert it
into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than
common stocks. Convertible securities generally provide yields higher than the
underlying common stocks, but generally lower than compatible nonconvertible
securities. Because of this higher yield, convertible securities generally sell
at prices above their "conversion value," which is the current market value of
the stock to be received upon conversion. The difference between this conversion
value and the price of convertible securities will vary over time depending on
changes in the value of the underlying common stocks and interest rates. When
the underlying common stocks decline in value, convertible securities will tend
not to decline to the same extent because of the interest or dividend payments
and the repayment of principal at maturity for certain types of convertible
securities. However, securities that are convertible other than at the option of
the holder generally do not limit the potential for loss to the same extent as
securities convertible at the option of the holder. When the underlying common
stocks rise in value, the value of convertible securities may also be expected
to increase. At the same time, however, the difference between the market value
of convertible securities and their conversion value will narrow, which means
that the value of convertible securities will generally not increase to the same
extent as the value of the underlying common stocks. Because convertible
securities may also be interest rate sensitive, their value may increase as
interest rates fall and decrease as interest rates rise. Convertible securities
are also subject to credit risk, and are often lower-quality securities.
BELOW INVESTMENT GRADE BONDS. Below investment grade bonds have poor
protection with respect to the payment of interest and repayment of principal,
or may be in default. These securities are often considered to be speculative
and involve greater risk of loss or price changes due to changes in the issuer's
capacity to pay. The market prices of below investment grade bonds may fluctuate
more than those of higher-quality debt securities and may decline significantly
in periods of general economic difficulty, which may follow periods of rising
interest rates.
While the market for below investment grade bonds has been in existence
for many years and has weathered previous economic downturns, the 1980s brought
a dramatic increase in the use of such securities to fund highly leveraged
corporate acquisitions and restructurings. Past experience may not provide an
accurate indication of the future performance of the below investment grade bond
market, especially during periods of economic recession.
The market for below investment grade bonds may be thinner and less active
than that for higher-quality debt securities, which can adversely affect the
prices at which the former are sold. If market quotations are not available,
below investment grade bonds will be valued in accordance with procedures
established by the Board of Directors, including the use of outside pricing
services. Judgment plays a greater role in valuing below investment grade bonds
than is the case for securities for which more external sources for quotations
and last-sale information are available. Adverse publicity and changing investor
perceptions may affect the liquidity of below investment grade bonds and the
ability of outside pricing services to value below investment grade bonds.
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Since the risk of default is higher for below investment grade bonds, the
Adviser's research and credit analysis are an especially important part of
managing securities of this type. The Adviser will attempt to identify those
issuers of below investment grade bonds whose financial condition is adequate to
meet future obligations, has improved, or is expected to improve in the future.
The Adviser's analysis focuses on relative values based on such factors as
interest or dividend coverage, asset coverage, earnings prospects, and the
experience and managerial strength of the issuer.
U.S. GOVERNMENT SECURITIES. Each fund may invest in U.S. Government
securities, including a variety of securities that are issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agreements
secured thereby. These securities include securities issued and guaranteed by
the full faith and credit of the U.S. Government, such as Treasury bills,
Treasury notes, and Treasury bonds; obligations supported by the right of the
issuer to borrow from the U.S. Treasury, such as those of the Federal Home Loan
Banks; and obligations supported only by the credit of the issuer, such as those
of the Federal Intermediate Credit Banks. Stripped Government securities are
created by separating the income and principal components of a U.S. Government
security and selling them separately. STRIPS (Separate Trading of Registered
Interest and Principal of Securities) are created when the coupon payments and
the principal payment are stripped from an outstanding U.S. Treasury security by
a Federal Reserve Bank.
Privately stripped government securities are created when a dealer
deposits a U.S. Treasury security or other U.S. Government security with a
custodian for safekeeping. The custodian issues separate receipts for the coupon
payments and the principal payment, which the dealer then sells.
MUNICIPAL OBLIGATIONS. These obligations, which are issued by state and
local governments to acquire land, equipment and facilities, typically are not
fully backed by the municipality's credit, and, if funds are not appropriated
for the following year's lease payments, a lease may terminate, with the
possibility of default on the lease obligation and significant loss to a fund.
The two principal classifications of municipal obligations are "general
obligation" and "revenue" bonds. "General obligation" bonds are secured by the
issuer's pledge of its faith, credit and taxing power. "Revenue" bonds are
payable only from the revenues derived from a particular facility or class of
facilities or facility being financed. Industrial development bonds ("IDBs") and
private activity bonds ("PABs") are usually revenue bonds and are not payable
from the unrestricted revenues of the issuer. The credit quality of the IDBs and
PABs is usually directly related to the credit standing of the corporate user of
the facilities. In addition, certain types of IDBs and PABs are issued by or on
behalf of public authorities to finance various privately operated facilities,
including certain pollution control facilities, convention or trade show
facilities, and airport, mass transit, port or parking facilities.
FOREIGN SECURITIES (HIGH INCOME FUND). Foreign securities, foreign
currencies, and securities issued by U.S. entities with substantial foreign
operations may involve significant risks in addition to the risks inherent in
U.S. investments.
Foreign investments involve risks relating to local political, economic,
regulatory, or social instability, military action or unrest, or adverse
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diplomatic developments, and may be affected by actions of foreign governments
adverse to the interests of U.S. investors. Such actions may include
expropriation or nationalization of assets, confiscatory taxation, restrictions
on U.S. investment or on the ability to repatriate assets or convert currency
into U.S. dollars, or other government intervention. There is no assurance that
the Adviser will be able to anticipate these potential events or counter their
effects. In addition, the value of securities denominated in foreign currencies
and of dividends and interest paid with respect to such securities will
fluctuate based on the relative strength of the U.S. dollar.
It is anticipated that in most cases the best available market for foreign
securities will be on an exchange or in over-the-counter ("OTC") markets located
outside of the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers may be less liquid and more volatile than
securities of comparable U.S. issuers. Foreign security trading, settlement and
custodial practices (including those involving securities settlement where fund
assets may be released prior to receipt of payment) are often less developed
than those in U.S. markets, and may result in increased risk or substantial
delays in the event of a failed trade or the insolvency of, or breach of duty
by, a foreign broker-dealer, securities depository or foreign subcustodian. In
addition, the costs associated with foreign investments, including withholding
taxes, brokerage commissions and custodial costs, are generally higher than with
U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers are generally not bound by uniform accounting, auditing,
financial reporting requirements and standards of practice comparable to those
applicable to U.S. issuers. Adequate public information on foreign issuers may
not be available, and it may be difficult to secure dividends and information
regarding corporate actions on a timely basis. In general, there is less overall
governmental supervision and regulation of securities exchanges, brokers, and
listed companies than in the United States. OTC markets tend to be less
regulated than stock exchange markets and, in certain countries, may be totally
unregulated. Regulatory enforcement may be influenced by economic or political
concerns, and investors may have difficulty enforcing their legal rights in
foreign countries.
Some foreign securities impose restrictions on transfer within the United
States or to U.S. persons. Although securities subject to such transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The risks of foreign investing may be magnified for investments in
emerging markets. Security prices in emerging markets can be significantly more
volatile than those in more developed markets, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, may present the risks of nationalization of businesses,
restrictions on foreign ownership and prohibitions on the repatriation of
assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be based on only
a few industries, may be highly vulnerable to changes in local or global trade
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conditions, and may suffer from extreme and volatile debt burdens or inflation
rates. Local securities markets may trade a small number of securities and may
be unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
FOREIGN CURRENCY TRANSACTIONS (HIGH INCOME FUND). The fund may conduct
foreign currency transactions on a spot (i.e., cash) or forward basis (i.e., by
entering into forward contracts to purchase or sell foreign currencies).
Although foreign exchange dealers generally do not charge a fee for such
conversions, they do realize a profit based on the difference between the prices
at which they are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency at one rate, while offering a lesser rate of
exchange should the counterparty desire to resell that currency to the dealer.
Forward contracts are customized transactions that require a specific amount of
a currency to be delivered at a specific exchange rate on a specific date or
range of dates in the future. Forward contracts are generally traded in an
interbank market directly between currency traders (usually large commercial
banks) and their customers. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may hold the contract
to maturity and complete the contemplated currency exchange. The fund may use
currency forward contracts for any purpose consistent with its investment
objective.
The following discussion summarizes the principal currency management
strategies involving forward contracts that could be used by the fund. The fund
may also use swap agreements, indexed securities, and options and futures
contracts relating to foreign currencies for the same purposes.
A "settlement hedge" or "transaction hedge" is designed to protect the
fund against an adverse change in foreign currency values between the date a
security is purchased or sold and the date on which payment is made or received.
Entering into a forward contract for the purchase or sale of the amount of
foreign currency involved in an underlying security transaction for a fixed
amount of U.S. dollars "locks in" the U.S. dollar price of the security. Forward
contracts to purchase or sell a foreign currency may also be used by the fund in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by the
Adviser.
The fund may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if
the fund owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes referred
to as a "position hedge," would tend to offset both positive and negative
currency fluctuations, but would not offset changes in security values caused by
other factors. The fund could also hedge the position by selling another
currency expected to perform similarly to the pound sterling. This type of
hedge, sometimes referred to as a "proxy hedge," could offer advantages in terms
of cost, yield, or efficiency, but generally would not hedge currency exposure
as effectively as a direct hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the currency
in which the hedged securities are denominated.
The fund may enter into forward contracts to shift its investment exposure
from one currency into another. This may include shifting exposure from U.S.
dollars to a foreign currency, or from one foreign currency to another foreign
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currency. This type of strategy, sometimes known as a "cross-hedge," will tend
to reduce or eliminate exposure to the currency that is sold, and increase
exposure to the currency that is purchased, much as if the fund had sold a
security denominated in one currency and purchased an equivalent security
denominated in another. Cross-hedges protect against losses resulting from a
decline in the hedged currency, but will cause a fund to assume the risk of
fluctuations in the value of the currency it purchases.
Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover currency
forward contracts. As required by SEC guidelines, the fund will segregate assets
to cover currency forward contracts, if any, whose purpose is essentially
speculative. The fund will not segregate assets to cover forward contracts
entered into for hedging purposes, including settlement hedges, position hedges,
and proxy hedges.
Successful use of currency management strategies will depend on the
Adviser's skill in analyzing currency values. Currency management strategies may
substantially change the fund's investment exposure to changes in currency
exchange rates and could result in losses to the fund if currencies do not
perform as the Adviser anticipates. For example, if a currency's value rose at a
time when the Adviser had hedged the fund by selling that currency in exchange
for dollars, the fund would not participate in the currency's appreciation. If
the Adviser hedges currency exposure through proxy hedges, the fund could
realize currency losses from both the hedge and the security position if the two
currencies do not move in tandem. Similarly, if the Adviser increases the fund's
exposure to a foreign currency and that currency's value declines, the fund will
realize a loss. There is no assurance that the Adviser's use of currency
management strategies will be advantageous to the fund or that it will hedge at
appropriate times.
INDEXED SECURITIES are instruments whose prices are indexed to the prices
of other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. Indexed securities typically, but
not always, are debt securities or deposits whose value at maturity or coupon
rate is determined by reference to a specific instrument or statistic.
Mortgage-indexed securities, for example, could be structured to replicate
the performance of mortgage securities and the characteristics of direct
ownership.
Gold-indexed securities typically provide for a maturity value that
depends on the price of gold, resulting in a security whose price tends to rise
and fall together with gold prices. Currency-indexed securities typically are
short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
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States and abroad. Indexed securities may be more volatile than the underlying
instruments. Indexed securities are also subject to the credit risks associated
with the issuer of the security, and their values may decline substantially if
the issuer's creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. Government agencies.
VARIABLE AND FLOATING RATE SECURITIES provide for periodic adjustments in
the interest rate paid on the security. Variable rate securities provide for a
specified periodic adjustment in the interest rate, while floating rate
securities have interest rates that change whenever there is a change in a
designated benchmark rate. Some variable or floating rate securities are
structured with put features that permit holders to demand payment of the unpaid
principal balance plus accrued interest from the issuers or certain financial
intermediaries.
ZERO COUPON BONDS do not make interest payments; instead, they are sold at
a discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can be
more volatile than other types of fixed-income securities when interest rates
change. In calculating each fund's dividend, a portion of the difference between
a zero coupon bond's purchase price and its face value is considered income.
FUTURES AND OPTIONS. The following paragraphs pertain to futures and
options: Asset Coverage for Futures and Options Positions, Purchasing Put and
Call Options, Writing Put and Call Options, OTC Options, Futures Contracts,
Futures Margin Payments, Options and Futures Relating to Foreign Currencies, and
Swap Agreements.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. Each fund will comply
with guidelines established by the SEC with respect to coverage of options and
futures strategies by mutual funds and, if the guidelines so require, will set
aside appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
futures or option strategy is outstanding, unless they are replaced with other
suitable assets. As a result, there is a possibility that segregation of a large
percentage of each fund's assets could impede portfolio management or each
fund's ability to meet redemption requests or other current obligations.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the purchaser
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the purchaser pays
the current market price for the option (known as the option premium). Options
have various types of underlying instruments, including specific securities,
indices of securities prices, and futures contracts. The purchaser may terminate
its position in a put option by allowing it to expire or by exercising the
option. If the option is allowed to expire, the purchaser will lose the entire
premium. If the option is exercised, the purchaser completes the sale of the
underlying instrument at the strike price. A purchaser may also terminate a put
option position by closing it out in the secondary market at its current price,
if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium, plus related
transaction costs).
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The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the
option.
WRITING PUT AND CALL OPTIONS. The writer of a put or call option takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the writer assumes the obligation to pay the strike
price for the option's underlying instrument if the other party to the option
chooses to exercise it. The writer may seek to terminate a position in a put
option before exercise by closing out the option in the secondary market at its
current price. If the secondary market is not liquid for a put option, however,
the writer must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position. When writing an option on a futures contract, each
fund will be required to make margin payments to an FCM as described above for
futures contracts.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received. If
security prices remain the same over time, it is likely that the writer will
also profit, because it should be able to close out the option at a lower price.
If security prices fall, the put writer would expect to suffer a loss. This loss
should be less than the loss from purchasing the underlying instrument directly,
however, because the premium received for writing the option should mitigate the
effects of the decline.
Writing a call option obligates the writer to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
Combined Positions involve purchasing and writing options in combination
with each other, or in combination with futures or forward contracts, to adjust
the risk and return characteristics of the overall position. For example,
purchasing a put option and writing a call option on the same underlying
instrument would construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, to reduce the risk of the written call
option in the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction costs and
may be more difficult to open and close out.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
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While this type of arrangement allows the purchaser or writer greater
flexibility to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
FUTURES CONTRACTS. In purchasing a futures contract, the buyer agrees to
purchase a specified underlying instrument at a specified future date. In
selling a futures contract, the seller agrees to sell a specified underlying
instrument at a specified future date. The price at which the purchase and sale
will take place is fixed when the buyer and seller enter into the contract. Some
currently available futures contracts are based on specific securities, such as
U.S. Treasury bonds or notes, and some are based on indices of securities
prices, such as the Standard & Poor's 500 Composite Stock Price Index ("S&P
500"). Futures can be held until their delivery dates, or can be closed out
before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase a fund's exposure to positive and negative price
fluctuations in the underlying instrument, much as if it had purchased the
underlying instrument directly. When a fund sells a futures contract, by
contrast, the value of its futures position will tend to move in a direction
contrary to the market. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is
not required to deliver or pay for the underlying instrument unless the contract
is held until the delivery date. However, both the purchaser and seller are
required to deposit "initial margin" with a futures broker, known as a futures
commission merchant ("FCM"), when the contract is entered into. Initial margin
deposits are typically equal to a percentage of the contract's value. If the
value of either party's position declines, that party will be required to make
additional "variation margin" payments to settle the change in value on a daily
basis. The party that has a gain may be entitled to receive all or a portion of
this amount. Initial and variation margin payments do not constitute purchasing
securities on margin for purposes of a fund's investment limitations. In the
event of the bankruptcy of an FCM that holds margin on behalf of a fund, the
fund may be entitled to return of margin owed to it only in proportion to the
amount received by the FCM's other customers, potentially resulting in losses to
the fund.
Each fund has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the Commodity Futures
Trading Commission ("CFTC") and the National Futures Association, which regulate
trading in the futures markets. The funds intend to comply with Rule 4.5 under
the Commodity Exchange Act, which limits the extent to which the funds can
commit assets to initial margin deposits and option premiums.
In addition, each fund will not (a) sell futures contracts, purchase put
options, or write call options if, as a result, more than 25% of the fund's
total assets would be hedged with futures and options under normal conditions;
(b) purchase futures contracts or write put options if, as a result, the fund's
total obligations upon settlement or exercise of purchased futures contracts and
written put options would exceed 25% of its total assets; or (c) purchase call
options if, as a result, the current value of option premiums for call options
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purchased by the fund would exceed 5% of the fund's total assets. These
limitations do not apply to options attached to or acquired or traded together
with their underlying securities, and do not apply to securities that
incorporate features similar to options.
The limitations below on the funds' investments in futures contracts and
options, and the funds' policies regarding futures contracts and options
discussed elsewhere in this SAI, may be changed as regulatory agencies permit.
Because there are a limited number of types of exchange-traded options and
futures contracts, it is likely that the standardized contracts available will
not match each fund's current or anticipated investments exactly. Each fund may
invest in options and futures contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which the
fund typically invests, which involves a risk that the options or futures
position will not track the performance of the fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts. Each fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in each fund's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
There is no assurance a liquid secondary market will exist for any
particular options or futures contract at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures contracts, and
may halt trading if a contract's price moves upward or downward more than the
limit in a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible to enter into new
positions or close out existing positions. The lack of liquidity in the
secondary market for a contract due to price fluctuation limits could prevent
prompt liquidation of unfavorable positions, and potentially could require a
fund to continue to hold a position until delivery or expiration regardless of
changes in its value. As a result, each fund's access to other assets held to
cover its options or futures positions could also be impaired.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES (HIGH INCOME FUND).
Currency futures contracts are similar to forward currency exchange contracts,
except that they are traded on exchanges (and have margin requirements) and are
standardized as to contract size and delivery date. Most currency futures
contracts call for payment or delivery in U.S. dollars. The underlying
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instrument of a currency option may be a foreign currency, which generally is
purchased or delivered in exchange for U.S. dollars, or may be a futures
contract. The purchaser of a currency call obtains the right to purchase the
underlying currency, and the purchaser of a currency put obtains the right to
sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indices, as discussed above. The fund may
purchase and sell currency futures and may purchase and write currency options
to increase or decrease its exposure to different foreign currencies. Currency
options may also be purchased or written in conjunction with each other or with
currency futures or forward contracts. Currency futures and options values can
be expected to correlate with exchange rates, but may not reflect other factors
that affect the value of the fund's investments. A currency hedge, for example,
should protect a Yen-denominated security from a decline in the Yen, but will
not protect the fund against a price decline resulting from deterioration in the
issuer's creditworthiness. Because the value of the fund's foreign-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to the
value of the fund's investments exactly over time.
SWAP AGREEMENTS can be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a fund's
exposure to long or short-term interest rates (in the United States or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as security prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names.
In a typical cap or floor agreement one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift a fund's investment exposure from one
type of investment to another. For example, if the High Income Fund agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the fund's exposure to U.S. interest rates and
increase its exposure to foreign currency and interest rates. Caps and floors
have an effect similar to buying or writing options. Depending on how they are
used, swap agreements may increase or decrease the overall volatility of a
fund's investments and its share price and yield.
The most significant factor in the performance of swap agreements is the
change in the specific interest rate, currency, or other factors that determine
the amounts of payments due to and from a fund. If a swap agreement calls for
payments by a fund, the fund must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declined, the value of a swap
agreement would be likely to decline, potentially resulting in losses. Each fund
may be able to eliminate its exposure under a swap agreement either by
assignment or other disposition, or by entering into an offsetting swap
agreement with the same party or a similarly creditworthy party.
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Each fund will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. If a
fund enters into a swap agreement on a net basis, it will segregate assets with
a daily value at least equal to the excess, if any, of the fund's accrued
obligations under the swap agreement over the accrued amount the fund is
entitled to receive under the agreement. If a fund enters into a swap agreement
on other than a net basis, it will segregate assets with a value equal to the
full amount of the fund's accrued obligations under the agreement.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they are
valued. Under the supervision of the Board of Directors, the Adviser determines
the liquidity of each fund's investments and, through reports from the Adviser,
the Board of Directors monitors investments in illiquid instruments. In
determining the liquidity of each fund's investments, the Adviser may consider
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the fund's rights and obligations
relating to the investment).
Investments currently considered by the Adviser to be illiquid include
repurchase agreements not entitling the holder to repayment of principal and
payment of interest within seven days, non-government stripped fixed-rate
mortgage-backed securities, and over-the-counter options. Also, the Adviser may
determine some restricted securities, government-stripped fixed-rate
mortgage-backed securities, loans and other direct debt instruments, emerging
market securities, and swap agreements to be illiquid. However, with respect to
over-the-counter options the funds write, all or a portion of the value of the
underlying instrument may be illiquid depending on the assets held to cover the
option and the nature and terms of any agreement the funds may have to close out
the option before expiration. In the absence of market quotations, illiquid
investments are priced at fair value as determined in good faith by a committee
appointed by the Board of Directors.
Restricted Securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the 1933 Act, or
in a registered public offering. The Adviser has the ability to deem restricted
securities as liquid. Where registration is required, each fund may be obligated
to pay all or part of the registration expense and a considerable period may
elapse between the time it decides to seek registration and the time it may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, a fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security.
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or sold in
transactions not requiring registration. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend on an efficient institutional market in which such unregistered
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securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment in order to satisfy share redemption orders. An insufficient number
of qualified institutional buyers interested in purchasing Rule 144A-eligible
securities held by a fund, however, could affect adversely the marketability of
such portfolio securities and a fund might be unable to dispose of such
securities promptly or at reasonable prices.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Direct debt instruments are
interests in amounts owed by a corporate, governmental, or other borrower to
lenders or lending syndicates (loans and loan participations), to suppliers of
goods or services (trade claims or other receivables), or to other parties.
Direct debt instruments are subject to the funds' policies regarding the quality
of debt securities.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of interest and
repayment of principal. Direct debt instruments may not be rated by any
nationally recognized statistical rating service. If scheduled interest or
principal payments are not made, the value of the instrument may be adversely
affected. Loans that are fully secured provide more protections than an
unsecured loan in the event of failure to make scheduled interest or principal
payments. However, there is no assurance that the liquidation of collateral from
a secured loan would satisfy the borrower's obligation, or that the collateral
could be liquidated. Indebtedness of borrowers whose creditworthiness is poor
involves substantially greater risks and may be highly speculative. Borrowers
that are in bankruptcy or restructuring may never pay off their indebtedness, or
may pay only a small fraction of the amount owed. Direct indebtedness of
developing countries also involves a risk that the governmental entities
responsible for the repayment of the debt may be unable, or unwilling, to pay
interest and repay principal when due.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional risks. For
example, if a loan is foreclosed, the purchaser could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, a purchaser could be held liable as a
co-lender. Direct debt instruments may also involve a risk of insolvency of the
lending bank or other intermediary. Direct debt instruments that are not in the
form of securities may offer less legal protection to the purchaser in the event
of fraud or misrepresentation. In the absence of definitive regulatory guidance,
the Adviser uses its research to attempt to avoid situations where fraud or
misrepresentation could adversely affect the funds.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, the purchaser has direct recourse against the borrower, the
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purchaser may have to rely on the agent to apply appropriate credit remedies
against a borrower. If assets held by the agent for the benefit of a purchaser
were determined to be subject to the claims of the agent's general creditors,
the purchaser might incur certain costs and delays in realizing payment on the
loan or loan participation and could suffer a loss of principal or interest.
Direct indebtedness may include letters of credit, revolving credit
facilities, or other standby financing commitments that obligate purchasers to
make additional cash payments on demand. These commitments may have the effect
of requiring a purchaser to increase its investment in a borrower at a time when
it would not otherwise have done so, even if the borrower's condition makes it
unlikely that the amount will ever be repaid. Each fund will set aside
appropriate liquid assets in a segregated custodial account to cover its
potential obligations under standby financing commitments.
Each fund limits the amount of total assets that it will invest in any one
issuer or in issuers within the same industry (see the funds' investment
limitations). For purposes of these limitations, a fund generally will treat the
borrower as the "issuer" of indebtedness held by the fund. In the case of loan
participations where a bank or other lending institution serves as financial
intermediary between each fund and the borrower, if the participation does not
shift to the funds the direct debtor-creditor relationship with the borrower,
SEC interpretations require the funds, in appropriate circumstances, to treat
both the lending bank or other lending institution and the borrower as "issuers"
for these purposes. Treating a financial intermediary as an issuer of
indebtedness may restrict the funds' ability to invest in indebtedness related
to a single financial intermediary, or a group of intermediaries engaged in the
same industry, even if the underlying borrowers represent many different
companies and industries.
REPURCHASE AGREEMENTS. In a repurchase agreement, a fund purchases a
security and simultaneously commits to sell that security back to the original
seller at an agreed-upon price. The resale price reflects the purchase price
plus an agreed-upon incremental amount which is unrelated to the coupon rate or
maturity of the purchased security. As protection against the risk that the
original seller will not fulfill its obligation, the securities are held in a
separate account at a bank, marked-to-market daily, and maintained at a value at
least equal to the sale price plus the accrued incremental amount. While it does
not presently appear possible to eliminate all risks from these transactions
(particularly the possibility that the value of the underlying security will be
less than the resale price, as well as delays and costs to a fund in connection
with bankruptcy proceedings), each fund will engage in repurchase agreement
transactions only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund
sells a security to another party, such as a bank or broker-dealer, in return
for cash and agrees to repurchase that security at an agreed-upon price and
time. While a reverse repurchase agreement is outstanding, a fund will maintain
appropriate liquid assets in a segregated custodial account to cover their
obligation under the agreement. The funds will enter into reverse repurchase
agreements only with parties whose creditworthiness has been reviewed and found
satisfactory by the Adviser. Such transactions may increase fluctuations in the
market value of fund assets and may be viewed as a form of leverage.
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DELAYED-DELIVERY TRANSACTIONS. Securities may be bought and sold on a
delayed-delivery or when-issued basis. These transactions involve a commitment
to purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security. Typically, no interest accrues to the purchaser until the
security is delivered. The funds may receive fees or price concessions for
entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the purchaser
assumes the rights and risks of ownership, including the risks of price and
yield fluctuations and the risk that the security will not be issued as
anticipated. Because payment for the securities is not required until the
delivery date, these risks are in addition to the risks associated with each
fund's investments. If each fund remains substantially fully invested at a time
when delayed-delivery purchases are outstanding, the delayed-delivery purchases
may result in a form of leverage. When delayed-delivery purchases are
outstanding, each fund will set aside appropriate liquid assets in a segregated
custodial account to cover the purchase obligations. When a fund has sold a
security on a delayed-delivery basis, the fund does not participate in further
gains or losses with respect to the security. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, the
fund could miss a favorable price or yield opportunity or suffer a loss.
Each fund may re-negotiate a delayed delivery transaction and may sell the
underlying securities before delivery, which may result in capital gains or
losses for the fund.
SECURITIES LENDING. Each fund may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows a fund to
retain ownership of the securities loaned and, at the same time, to earn
additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties deemed by the Adviser to be
of good standing. Furthermore, they will only be made if, in the Adviser's
judgment, the consideration to be earned from such loans would justify the risk.
The Adviser understands that it is the current view of the SEC Staff that
a fund may engage in loan transactions only under the following conditions: (1)
the fund must receive 100% collateral in the form of cash or cash equivalents
(e.g., U.S. Treasury bills or notes) from the borrower; (2) the borrower must
increase the collateral whenever the market value of the securities loaned
(determined on a daily basis) rises above the value of the collateral; (3) after
giving notice, the fund must be able to terminate the loan at any time; (4) the
fund must receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest, or other
distributions on the securities loaned and to any increase in market value; (5)
the fund may pay only reasonable custodian fees in connection with the loan; and
(6) the Board of Directors must be able to vote proxies on the securities
loaned, either by terminating the loan or by entering into an alternative
arrangement with the borrower.
Cash received through loan transactions may be invested in other eligible
securities. Investing this cash subjects that investment, as well as the
security loaned, to market forces (i.e., capital appreciation or depreciation).
SHORT SALES. A fund may enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if the Adviser
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anticipates a decline in the price of the stock underlying a convertible
security a fund holds, it may sell the stock short. If the stock price
subsequently declines, the proceeds of the short sale could be expected to
offset all or a portion of the effect of the stock's decline on the value of the
convertible security. Each fund currently intends to hedge no more than 15% of
its total assets with short sales on equity securities underlying its
convertible security holdings under normal circumstances.
When a fund enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or securities
convertible or exchangeable into such securities) and will be required to hold
them aside while the short sale is outstanding. A fund will incur transaction
costs, including interest expenses, in connection with opening, maintaining, and
closing short sales.
SOURCES OF CREDIT OR LIQUIDITY SUPPORT. The Adviser may rely on its
evaluation of the credit of a bank or other entity in determining whether to
purchase a security supported by a letter of credit guarantee, put or demand
feature, insurance or other source of credit or liquidity. In evaluating the
credit of a foreign bank or other foreign entities, the Adviser will consider
whether adequate public information about the entity is available and whether
the entity may be subject to unfavorable political or economic developments,
currency controls, or other government restrictions that might affect its
ability to honor its commitment.
LEVERAGE. The use of leverage by each fund creates an opportunity for
increased net income and capital growth for the fund, but, at the same time,
creates special risks, and there can be no assurance that a leveraging strategy
will be successful during any period in which it is employed. Each fund intends
to utilize leverage to provide the shareholders with a potentially higher
return. Leverage creates risks for a fund including the likelihood of greater
volatility of net asset value and market price of the shares and the risk that
fluctuations in interest rates on borrowings and short-term debt or in the
dividend rates on any preferred shares may affect the return to a fund. To the
extent the income or capital growth derived from securities purchased with funds
received from leverage exceeds the cost of leverage, a fund's return will be
greater than if leverage had not been used. Conversely, if the income or capital
growth from the securities purchased with such funds is not sufficient to cover
the cost of leverage, the return to a fund will be less than if leverage had not
been used, and therefore the amount available for distribution to shareholders
as dividends and other distributions will be reduced. In the latter case, the
Adviser in its best judgment nevertheless may determine to maintain a fund's
leveraged position if it deems such action to be appropriate under the
circumstances. Certain types of borrowings by a fund may result in the fund's
being subject to covenants in credit agreements, including those relating to
asset coverage and portfolio composition requirements. A fund may be subject to
certain restrictions on investments imposed by guidelines of one or more rating
agencies, which may issue ratings for the corporate debt securities or preferred
shares purchased by a fund. These guidelines may impose asset coverage or
portfolio composition requirements that are more stringent than those imposed by
the 1940 Act. It is not anticipated that these covenants or guidelines will
impede the fund in managing the fund's portfolio in accordance with the fund's
investment objectives and policies.
YEAR 2000 RISKS. Like other financial and business organizations, the
funds could be adversely affected if computer systems on which they rely do not
properly process date-related information and data involving the years 2000 and
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after. The Adviser is taking steps that it believes are reasonable to address
this problem in its own computer systems and to obtain assurances that
comparable steps are being taken by each fund's other major service providers.
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the funds. Companies in the funds' portfolios may also be
adversely affected by the Year 2000 issue.
EFFECTIVE MATURITY is the calculated maturity based on analytical factors
that estimate the actual expected return of principal rather than the stated
final maturity date. For example, a mortgage-backed bond may have a 30-year
stated final maturity. However, given the expected periodic principal
prepayments of that bond, the effective maturity may be 10 years rather than the
stated 30 years. The average effective maturity is the dollar-weighted average
of effective maturities of the securities in the fund's portfolio.
TOTAL RETURN is composed of the income received on the securities held by
the fund and either capital appreciation or depreciation of those securities.
Each fund may not issue senior securities, except as permitted under the
1940 Act. This policy shall not prohibit reverse repurchase agreements, deposits
of assets to margin or guarantee positions in futures, options, swaps and
forward contracts, or the segregation of assets in connection with such
contracts.
Each fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder to
seek to protect the interests of security holders if it determines this to be in
the best interest of the fund's shareholders.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax considerations
affecting each fund and its shareholders. Investors are urged to consult their
own tax advisers for more detailed information and for information regarding any
state, local or foreign taxes that may be applicable to them.
GENERAL
Each fund (which is treated as a separate corporation for federal tax purposes)
intends to qualify for treatment as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code"). To
qualify for that treatment, each fund must distribute annually to its
shareholders at least 90% of its investment company taxable income (generally,
net investment income plus net short-term capital gain plus, in the case of the
High Income Fund, net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements. For
each fund, these requirements include the following: (1) at least 90% of the
fund's gross income each taxable year must be derived from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
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(2) at the close of each quarter of the fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
Government securities, securities of other RICs and other securities, with these
other securities limited, with respect to any one issuer, to an amount that does
not exceed 5% of the value of the fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities; and (3)
at the close of the quarter of each fund's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer. If a
fund failed to qualify for treatment as a RIC for any taxable year, (1) it would
be taxed at corporate rates on the full amount of its taxable income for that
year without being able to deduct the distributions it makes to its shareholders
and (2) the shareholders would treat all those distributions, including
distributions of net capital gain (the excess of net long-term capital gain over
net short-term capital loss), as dividends (that is, ordinary income) to the
extent of the fund's earnings and profits. In addition, the fund could be
required to recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before requalifying for RIC treatment.
Each fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
DIVIDENDS AND OTHER DISTRIBUTIONS
A portion of the dividends from a fund's investment company taxable income
(whether paid in cash or reinvested in additional fund shares) is eligible for
the dividends-received deduction allowed to corporations. The eligible portion
may not exceed the aggregate dividends received by a fund from domestic
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the federal alternative minimum tax. Distributions by each fund of
net capital gain do not qualify for the dividends-received deduction.
Dividends or other distributions declared by a fund in December of any
year and payable to shareholders of record on a date in that month will be
deemed to have been paid by the fund and received by the shareholders on
December 31 if they are paid by the fund during the following January.
Accordingly, such distributions will be taxed to the shareholders for the year
in which that December 31 falls.
A dividend or capital gain distribution paid shortly after shares have
been purchased, although in effect a return of investment, is subject to federal
taxation. Accordingly, an investor should not purchase fund shares immediately
prior to a dividend or capital gain distribution record date solely for the
purpose of receiving the dividend or distribution.
REDEMPTIONS
A redemption of a fund's shares will result in a taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are more or
less than the shareholder's adjusted basis for the redeemed shares (which
normally includes any sales load paid on Class A shares). An exchange of shares
of either fund for shares of the other fund or Morgan Keegan Southern Capital
Fund generally will have similar tax consequences. Special rules apply when a
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shareholder disposes of Class A shares of a fund through a redemption or
exchange within 60 days after purchase thereof and subsequently reacquires Class
A shares of that fund or acquires Class A shares of the other fund or the Morgan
Keegan Southern Capital Fund without paying a sales charge due to the
reinstatement privilege or exchange privilege. In these cases, any gain on the
disposition of the original Class A shares will be increased, or any loss
decreased, by the amount of the sales charge paid when the shareholder acquired
those shares, and that amount will increase the basis of the shares subsequently
acquired. In addition, if a shareholder purchases shares of a fund (whether
pursuant to the reinstatement privilege or otherwise) within 30 days before or
after redeeming at a loss other shares of that fund (regardless of class), all
or part of that loss will not be deductible and instead will increase the basis
of the newly purchased shares.
If shares of a fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
INCOME FROM FOREIGN SECURITIES
Dividends and interest received on foreign securities by the High Income
Fund, and gains it realizes thereon, may be subject to income, withholding or
other taxes imposed by foreign countries and U.S. possessions ("foreign taxes")
that would reduce the yield and/or total return on its securities. Tax
conventions between certain countries and the United States may reduce or
eliminate foreign taxes, however, and many foreign countries do not impose taxes
on capital gains in respect of investments by foreign investors.
The High Income Fund may invest in the stock of "passive foreign
investment companies" ("PFICs"). A PFIC is a foreign corporation -- other than a
"controlled foreign corporation" (I.E., a foreign corporation in which, on any
day during its taxable year, more than 50% of the total voting power of all
voting stock therein or the total value of all stock therein is owned, directly,
indirectly, or constructively, by "U.S. shareholders," defined as U.S. persons
that individually own, directly, indirectly, or constructively, at least 10% of
that voting power) as to which the High Income Fund is a U.S. shareholder --
that, in general, meets either of the following tests: (1) at least 75% of its
gross income is passive or (2) an average of at least 50% of its assets produce,
or are held for the production of, passive income. Under certain circumstances,
the High Income Fund will be subject to federal income tax on a portion of any
"excess distribution" received on the stock of a PFIC or of any gain on
disposition of the stock (collectively "PFIC income"), plus interest thereon,
even if the fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent it distributes that income to its shareholders.
If the High Income Fund invests in a PFIC and elects to treat the PFIC as
a "qualified electing fund" ("QEF"), then in lieu of the foregoing tax and
interest obligation, the fund will be required to include in income each year
its pro rata share of the QEF's annual ordinary earnings and net capital gain --
which most likely would have to be distributed by the fund to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax -- even if those
earnings and gain were not distributed to the fund by the QEF. In most instances
it will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
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The High Income Fund may elect to "mark-to-market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the fund for
prior taxable years. The High Income Fund's adjusted basis in each PFIC's stock
with respect to which it makes this election will be adjusted to reflect the
amounts of income included and deductions taken under the election.
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of debt securities denominated in foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
dates of acquisition and disposition of the securities and (3) that are
attributable to fluctuations in exchange rates that occur between the time the
High Income Fund accrues dividends, interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
fund actually collects the receivables or pays the liabilities, generally will
be treated as ordinary income or loss. These gains or losses, referred to under
the Code as "section 988" gains or losses, may increase or decrease the amount
of the High Income Fund's investment company taxable income to be distributed to
its shareholders.
HEDGING STRATEGIES
The use of hedging strategies, such as selling (writing) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the amount, character
and timing of recognition of the gains and losses a fund realizes in connection
therewith. Gains from the disposition of foreign currencies (except certain
gains that may be excluded by future regulations), and gains from options,
futures and forward contracts derived by a fund with respect to its business of
investing in securities or foreign currencies, will qualify as permissible
income under the Income Requirement.
Certain futures and foreign currency contracts in which a fund may invest
will be "section 1256 contracts." Section 1256 contracts held by a fund at the
end of each taxable year, other than section 1256 contracts that are part of a
"mixed straddle" with respect to which it has made an election not to have the
following rules apply, must be "marked-to-market" (that is, treated as sold for
their fair market value) for federal income tax purposes, with the result that
unrealized gains or losses will be treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, will
be treated as long-term capital gain or loss, and the balance will be treated as
short-term capital gain or loss. Section 1256 contracts also may be
marked-to-market for purposes of the Excise Tax. These rules may operate to
increase the amount that a fund must distribute to satisfy the Distribution
Requirement, which will be taxable to the shareholders as ordinary income, and
to increase the net capital gain recognized by a fund, without in either case
increasing the cash available to the fund.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which a fund may invest. Section 1092 defines a
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"straddle" as offsetting positions with respect to personal property; for these
purposes, options and futures contracts are personal property. Section 1092
generally provides that any loss from the disposition of a position in a
straddle may be deducted only to the extent the loss exceeds the unrealized gain
on the offsetting position(s) of the straddle. Section 1092 also provides
certain "wash sale" rules, which apply to transactions where a position is sold
at a loss and a new offsetting position is acquired within a prescribed period,
and "short sale" rules applicable to straddles. If a fund makes certain
elections, the amount, character and timing of the recognition of gains and
losses from the affected straddle positions would be determined under rules that
vary according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to a
fund of straddle transactions are not entirely clear.
If a fund has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward contract,
or short sale) with respect to any stock, debt instrument (other than "straight
debt") or partnership interest the fair market value of which exceeds its
adjusted basis -- and enters into a "constructive sale" of the same or
substantially similar property, the fund will be treated as having made an
actual sale thereof, with the result that gain will be recognized at that time.
A constructive sale generally consists of a short sale, an offsetting notional
principal contract or futures or forward contract entered into by a fund or a
related person with respect to the same or substantially similar property. In
addition, if the appreciated financial position is itself a short sale or such a
contract, acquisition of the underlying property or substantially similar
property will be deemed a constructive sale. The foregoing will not apply,
however, to any transaction during any taxable year that otherwise would be
treated as a constructive sale if the transaction is closed within 30 days after
the end of that year and the fund holds the appreciated financial position
unhedged for 60 days after that closing (I.E., at no time during that 60-day
period is the fund's risk of loss regarding that position reduced by reason of
certain specified transactions with respect to substantially similar or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale or granting an option to buy substantially identical
stock or securities).
ORIGINAL ISSUE DISCOUNT SECURITIES
A fund may acquire zero coupon or other securities issued with original
issue discount ("OID"). As a holder of those securities, a fund must include in
its income the OID that accrues on them during the taxable year, even if it
receives no corresponding payment on them during the year. Because a fund
annually must distribute substantially all of its investment company taxable
income, including any OID, to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax, a fund may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. Those distributions will be made from a fund's cash assets
or from the proceeds of sales of securities, if necessary. A fund may realize
capital gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gain.
ADDITIONAL INFORMATION ON REDEMPTIONS
Suspension of the right of redemption, or postponement of the date of
payment, may be made (1) for any periods when the New York Stock Exchange (the
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"NYSE") is closed (other than customary weekend and holiday closings); (2) when
trading is restricted in markets normally utilized by each fund or when an
emergency, as defined by the rules and regulations of the SEC exists, making
disposal of the funds' investments or determination of its net asset value not
reasonably practicable; or (3) for such other periods as the SEC by order may
permit for protection of the funds' shareholders. In the case of any such
suspension, you may either withdraw your request for redemption or receive
payment based upon the net asset value next determined after the suspension is
lifted.
Each fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption by making payment in whole or
in part by securities valued in the same way as they would be valued for
purposes of computing the funds' per share net asset value. However, each fund
has committed itself to pay in cash all requests for redemption by any
shareholder of record, limited in amount with respect to each shareholder during
any ninety-day period to the lesser of (1) $250,000, or (2) 1% of the net asset
value of the fund at the beginning of such period. If payment is made in
securities, a shareholder will incur brokerage or transactional expenses in
converting those securities into cash, will be subject to fluctuation in the
market price of those securities until they are sold, and may realize taxable
gain or loss (depending on the value of the securities received and the
shareholder's adjusted basis of the redeemed shares).
VALUATION OF SHARES
Net asset value of each fund's share will be determined daily as of the
close of the NYSE, on every day that the NYSE is open for business, by dividing
the value of the total assets of the fund, less liabilities, by the total number
of shares outstanding at such time. Pricing will not be done on days when the
NYSE is closed. Currently, the NYSE is closed on weekends and on certain days
relating to the following holidays: New Year's Day, Martin Luther King's Day,
Presidents' Day, Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving
and Christmas. Securities owned by each fund for which market quotations are
readily available will be valued at current market value, or, in their absence,
at fair value as determined under procedures adopted by the funds' Board of
Directors. Securities traded on an exchange or NASD National Market System
securities (including debt securities) will normally be valued at their last
sale price. Other over-the-counter securities (including debt securities), and
securities traded on exchanges for which there is no sale on a particular day
(including debt securities), will be valued by a method which the funds' Board
of Directors believes accurately reflects fair value.
Foreign securities are valued based on prices furnished by independent
brokers or quotation services which express the value of securities in their
local currency. The Adviser gathers all exchange rates daily at the close of the
NYSE using the last quoted price on the local currency and then translates the
value of foreign currencies from their local currencies into U.S. dollars. Any
changes in the value of forward contracts due to exchange rate fluctuations and
days to maturity are included in the calculation of the net asset value. If an
extraordinary event that is expected to materially affect the value of a
portfolio security occurs after the close of an exchange on which that security
is traded, then that security will be valued as determined in good faith by a
committee appointed by the Board of Directors.
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In the absence of readily available market quotations, securities are
valued based upon appraisals received from an independent pricing service using
an electronic data processing and/or computerized matrix system using methods
which include consideration of yields or prices of bonds of comparable quality,
type of issue, coupon, maturity and rating indications as to value from dealers,
and general market conditions. Debt securities with remaining maturities of 60
days or less are valued at amortized cost, or original cost plus accrued
interest, both of which approximate market.
Futures contracts and options are valued on the basis of market
quotations, if available. Premiums received on the sale of call options are
included in the funds' net asset value, and the current market value of options
sold by the funds will be subtracted from net assets. Securities of other
open-end investment companies are valued at their respective net asset values.
PURCHASE OF SHARES
CLASS A SHARES
Class A shares are offered on a continuous basis at a price equal to their
net asset value plus the applicable "initial sales charge" described in the
Prospectus. Proceeds from the initial sales charge are paid to Morgan Keegan and
are used by Morgan Keegan to defray expenses related to providing
distribution-related services to the funds in connection with sales of Class A
shares, such as the payment of compensation to Morgan Keegan brokers for selling
Class A shares. No initial sales charge is imposed on Class A shares issued as a
result of the automatic reinvestment of dividends or capital gains distribution.
CLASS C SHARES
Class C shares are offered on a continuous basis at a price equal to their
net asset value. Class C shares that are redeemed within one year of purchase
are subject to a contingent deferred sales charge ("CDSC") charged as a
percentage of the dollar amount subject thereto. In determining whether a Class
C CDSC is applicable to a redemption, the calculation will be determined in the
manner that results in the lowest possible rate being charged. The charge will
be assessed on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial purchase price. In
addition, no Class C CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions. The charge will not be applied to
dollar amounts representing an increase in the net asset value since the time of
purchase. Proceeds from the CDSC are paid to Morgan Keegan to defray the
expenses Morgan Keegan incurs in providing distribution-related services to the
Class C shares.
CLASS I SHARES
Class I shares are offered on a continuous basis at a price equal to their
net asset value, without an initial sales charge or CDSC.
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PERFORMANCE INFORMATION
The funds' performance information and quoted rankings used in advertising
and other promotional materials ("Performance Advertisements") are indicative
only of past performance and are not intended to and do not represent future
investment results. The funds' share price will fluctuate and shares, when
redeemed, may be worth more or less than originally paid.
TOTAL RETURN CALCULATIONS
Average annual total return quotes ("Standardized Return") used in the
funds' Performance Advertisements are calculated according to the following
formula:
n
P(1 + T) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of
that period
Because each class of the funds has its own sales charge and fee
structure, the classes have different performance results. In the case of each
class, this calculation assumes the maximum sales charge is included in the
initial investment or the CDSC is applied at the end of the period,
respectively. This calculation assumes that all dividends and other
distributions are reinvested at net asset value on the reinvestment dates during
the period. The "distribution rate" is determined by annualizing the result of
dividing the declared distributions of each fund during the period stated by the
maximum offering price or net asset value at the end of the period. Excluding
the funds' sales charge or Class A shares and the CDSC on Class C shares from
the distribution rate produces a higher rate.
In addition to average annual total returns, the funds may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking each fund's sales charge on
Class A shares or the CDSC on Class C shares into account. Excluding the funds'
sales charge on Class A shares and the CDSC on Class C shares from a total
return calculation produces a higher total return figure.
The funds may advertise yield, where appropriate. Each fund's yield is
computed by dividing net investment income per share determined for a 30-day
period ("Period") by the maximum offering price per share (which includes the
full sales charge, if applicable) on the last day of the period, according to
the following standard:
a-b 6
Yield = 2 times [bracket] --- + 1 [end bracket] - 1
cd
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a = dividends and interest earned during the period
where: b = net expenses accrued during the period
c = the average daily number of fund shares outstanding
during the period that would be entitled to receive
dividends
d = the maximum offering price per share on the last day
of the period (NAV where applicable)
In determining interest earned during the Period (variable "a" in the
above formula), a fund calculates interest earned on each debt obligation held
by it during the Period by (1) computing the obligation's yield to maturity
based on the market value of the obligation (including actual accrued interest)
on the last business day of the Period or, if the obligation was purchased
during the Period, the purchase price plus accrued interest and (2) dividing the
yield to maturity by 360, and multiplying the resulting quotient by the market
value of the obligation (including actual accrued interest). Once interest
earned is calculated in this fashion for each debt obligation held by the fund,
interest earned during the Period is then determined by totaling the interest
earned on all debt obligations. For the purposes of these calculations, the
maturity of an obligation with one or more call provisions is assumed to be the
next call date on which the obligation reasonably can be expected to be called
or, if none, the maturity date.
With respect to the treatment of discount and premium on mortgage-backed
and other asset-backed obligations that are expected to be subject to monthly
payments of principal and interest ("paydowns"): (1) a fund accounts for gain or
loss attributable to actual paydowns as an increase or decrease to interest
income during the period and (2) a fund accrues the discount and amortizes the
premium on the remaining obligation, based on the cost of the obligation, to the
weighted average maturity date or, if weighted average maturity information is
not available, to the remaining term of the obligation.
OTHER INFORMATION
From time to time each fund may compare its performance in Performance
Advertisements to the performance of other mutual funds or various market
indices. The funds may also quote rankings and ratings, and compare the return
of the funds with data published by Lipper Analytical Services, Inc.,
IBC/Donaghue's Money Market fund Report, CDA Investment Technologies, Inc.,
Wiesenberger Investment Companies Service, Investment Company Data Inc.,
Morningstar Mutual funds, Value Line and other services or publications that
monitor, compare, rank and/or rate the performance of mutual funds. The funds
may refer in such materials to mutual fund performance rankings, ratings or
comparisons with funds having similar investment objectives, and other mutual
funds reported in independent periodicals, including, but not limited to, The
Wall Street Journal, Money Magazine, Forbes, Business Week, Financial World,
Barron's, Fortune, The New York Times, The Chicago Tribune, The Washington Post
and The Kiplinger Letters.
The funds may also compare their performance with, or may otherwise
discuss, the performance of bank certificates of deposit ("CDs") and other bank
deposits, and may quote from organizations that track the rates offered on such
deposits. In comparing the funds or their performance to CDs, investors should
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keep in mind that bank CDs are insured up to specified limits by an agency of
the U.S. government. Shares of the funds are not insured or guaranteed by the
U.S. government, the value of funds' shares will fluctuate and shares, when
redeemed, may be worth more or less than originally paid. Unlike the interest
paid on many CDs, which remains as a specified rate for a specified period of
time, the return on funds' shares will vary.
Each fund's Performance Advertisements may reference the history of the
fund's Adviser and its affiliates or biographical information of key investment
and managerial personnel including the portfolio manager. The funds may
illustrate hypothetical investment plans designed to help investors meet
long-term financial goals, such as saving for a college education or for
retirement. The funds may discuss the advantages of saving through tax-deferred
retirement plans or accounts.
TAX-DEFERRED RETIREMENT PLANS
As noted in the funds' Prospectus, an investment in a fund's shares may be
appropriate for various types of tax-deferred retirement plans. In general,
income earned through the investment of assets of such a plan is not taxed to
the beneficiaries until the income is distributed to them. Investors who are
considering establishing such a plan may wish to consult their attorneys or
other tax advisers with respect to individual tax questions. Additional
information with respect to these plans is available upon request from any
Morgan Keegan broker.
INDIVIDUAL RETIREMENT ACCOUNTS - IRAS
If you have earned income from employment (including self-employment), you
can contribute each year to an IRA up to the lesser of (1) $2,000 for yourself
or $4,000 for you and your spouse, regardless of whether your spouse is
employed, or (2) 100% of compensation. Some individuals may be able to take an
income tax deduction for the contribution. Regular contributions may not be made
for the year you become 70-1/2 or thereafter. Nondeductible contributions may
also be made to an "education IRA" or a "Roth IRA," distributions from which are
not taxable under certain circumstances.
An investment in a fund's shares through IRA contributions may be
advantageous, regardless of whether the contributions are deductible by you for
tax purposes, because all dividends and capital gain distributions on your fund
shares are not immediately taxable to you or the IRA; they become taxable only
when distributed to you except as noted above. Distributions made before age 59
1/2, in addition to being taxable, generally are subject to a penalty equal to
10% of the distribution, except in the case of death or disability, when the
distribution is rolled over into another qualified plan, or in certain other
situations.
SELF-EMPLOYED INDIVIDUAL RETIREMENT PLANS - KEOGH PLANS
Morgan Keegan will assist self-employed individuals to set up a retirement
plan through which a fund's shares may be purchased. Morgan Keegan generally
arranges for a bank to serve as trustee for the plan and performs custodian
services for the trustee and the plan by holding and handling securities.
However, you have the right to use a bank of your choice to provide these
services at your cost. There are penalties for distributions from a Keogh Plan
prior to age 59 1/2, except in the case of death or disability.
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SIMPLIFIED EMPLOYEE PENSION PLANS - SEPPS AND
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES - SIMPLES
Morgan Keegan also will make available in a similar manner to corporate
and other employers a SEPP or SIMPLE for investment in fund shares.
DIRECTORS AND OFFICERS
The funds' officers are responsible for the operation of the funds under
the direction of the Board of Directors. The officers and directors of the funds
and their principal occupations during the past five years are set forth below.
An asterisk (*) indicates officers and/or directors who are interested persons
of the funds as defined by the 1940 Act. The address of each officer and
director is Morgan Keegan Tower, 50 Front Street, Memphis, Tennessee 38103,
unless otherwise indicated.
Name Position with the fund and Principal Occupation
During Past Five Years
Allen B. Morgan, Jr.* President and Director. Mr. Morgan is Chairman
Age 57 and Chief Executive Officer and Executive
Managing Director of Morgan Keegan & Company,
Inc. He also is a Chairman of Morgan Keegan,
Inc., a Director of Morgan Asset Management,
Inc., and a Director of Catherine's Stores, Inc.
James D. Witherington, Jr. Director. Mr. Witherington is President of SSM
845 Crossover Lane Corp. (management of venture capital funds).
Suite 140 He also serves as a Director for several
Memphis, Tennessee 38117 private companies.
Age 50
William F. Hughes, Jr. Mr. Hughes is a Managing Director of Morgan
Age 56 Keegan & Company, Inc. He also is President of
Morgan Asset Management, Inc.
William Jefferies Mann Director. Mr. Mann is Chairman and President
675 Oakleaf Office Lane of Mann Investments, Inc. (hotel
Suite 100 investments/consulting). He also serves as a
Memphis, Tennessee 38117 Director for Heavy Machines, Inc.
Age 67
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Name Position with the fund and Principal Occupation
During Past Five Years
James Stillman R. McFadden Director. Mr. McFadden is Vice President of
845 Crossover Lane Sterling Equities, Inc. (private equity
Suite 124 financings). He is also President and Director
Memphis, Tennessee 38117 of 1703, Inc. (restaurant management) and a
Age 42 Director of Starr Printing Co.
Joseph C. Weller* Vice President, Treasurer & Assistant
Age 60 Secretary. Mr. Weller is Executive Vice
President and Chief Financial Officer and
Executive Managing Director of Morgan Keegan &
Company, Inc. He also is a Director of Morgan
Asset Management, Inc.
Charles D. Maxwell* Secretary and Assistant Treasurer. Mr. Maxwell
Age 45 is a Managing Director and Assistant Treasurer
of Morgan Keegan & Company, Inc. and
Secretary/Treasurer of Morgan Asset Management,
Inc. He was formerly a senior manager with
Ernst & Young (accountants) (1976-86).
TABLE OF COMPENSATION(1)
<TABLE>
<CAPTION>
Total Compensation
Name and Position Aggregate Compensation in the Morgan Keegan funds
With the Company From the Company Complex Paid to Directors
---------------- ---------------- -------------------------
<S> <C> <C>
Allen B. Morgan, Jr. $0 $0
President and Director
James D. Witherington, Jr. $4,000 $8,000
Director
William F. Hughes, Jr. $0 $0
Director
William Jeffries Mann $4,000 $8,000
Director
James Stillman R. McFadden $4,000 $8,000
Director
</TABLE>
Officers and directors of the Company who are interested persons of the Company
receive no salary or fees from the Company.
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(1) These estimates are based on the compensation schedule adopted for the
Company's first year of operations. The Morgan Keegan funds Complex consists of
one other investment company with one series.
INVESTMENT ADVISER
Morgan Asset Management, Inc., an affiliate of Morgan Keegan, serves as
the funds' investment adviser and manager under an Investment Advisory and
Management Agreement ("Advisory Agreement"). The Advisory Agreement became
effective as of February 26, 1999. The Advisory Agreement provides that, subject
to overall supervision by the Board of Directors, the Adviser manages the
investment and other affairs of the funds. The Adviser is responsible for
managing the funds' portfolio securities and for making purchases and sales of
portfolio securities consistent with the funds' investment objective, policies
and limitations described in the Prospectus and this SAI. The Adviser is
obligated to furnish the funds with office space as well as with executive and
other personnel necessary for the operation of the funds. In addition, the
Adviser is obligated to supply the Board of Directors and officers of the funds
with certain statistical information and reports, to oversee the maintenance of
various books and records and to arrange for the preservation of records in
accordance with applicable federal law and regulations. The Adviser and its
affiliates also are responsible for the compensation of directors and officers
of each fund who are employees of the Adviser and/or its affiliates.
The funds bear separately all their other expenses which are not assumed
by the Adviser. These expenses include, among others: legal and audit expense;
organizational expenses; interest; taxes; governmental fees; membership fees for
investment company organizations: the cost (including brokerage commissions or
charges, if any) of securities purchased or sold by the funds and any losses
incurred in connection therewith; fees of custodians, transfer agents,
registrars or other agents; distribution fees; expenses of preparing share
certificates; expenses relating to the redemption of the funds' shares; expenses
of registering and qualifying funds' shares for sale under applicable federal
and state laws and maintaining such registrations and qualifications; expenses
of preparing, setting in print, printing and distributing prospectuses, proxy
statements, reports, notices and dividends to each fund's shareholders; costs of
stationery; costs of shareholders and other meetings of the funds; compensation
and expenses of the independent directors; and insurance covering each fund and
its respective officers and directors. The funds are also liable for such
nonrecurring expenses as may arise, including litigation to which the funds may
be party. The funds also may have an obligation to indemnify its directors and
officers with respect to any such litigation.
The Intermediate Fund pays the Adviser a management fee at an annual rate
of 0.40% of the fund's average daily net assets. As of June 30, 1999, the
Intermediate Fund paid the Adviser $3,709. The High Income Fund pays the Adviser
a management fee at an annual rate of 0.75% of the fund's average daily net
assets. As of June 30, 1999, the High Income Fund paid the Adviser $5,823.
The Advisory Agreement will remain in effect from year to year, provided
such continuance is approved by a majority of the Board of Directors or by vote
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of the holders of a majority of the outstanding voting securities of each fund.
Additionally, the Advisory Agreement must be approved annually by vote of a
majority of the directors of the funds who are not parties to the Agreement or
"interested persons" of such parties as that term is defined in the 1940 Act.
The Advisory Agreement may be terminated by the Adviser or the funds, without
penalty, on 60 days' written notice to the other, and will terminate
automatically in the event of its assignment.
Under the Advisory Agreement, the funds will have the non-exclusive right
to use the name "Morgan Keegan" until the Agreement is terminated, or until the
right is withdrawn in writing by the Adviser.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Advisory Agreement, the Adviser is responsible for the execution
of the funds' portfolio transactions and must seek the most favorable price and
execution for such transactions, subject to the possible payment, as described
below, of higher commissions to brokers who provide research and analysis. The
funds may not always pay the lowest commission or spread available. Rather, the
funds also will take into account such factors as size of the order, difficulty
of execution, efficiency of the executing brokers facilities (including the
services described below) and any risk assumed by the executing broker.
The Adviser may give consideration to research, statistical and other
services furnished by broker/dealers to the Adviser for its use, may place
orders with broker/dealers who provide supplemental investment and market
research and securities and economic analysis, and may pay to those brokers a
higher brokerage commission or spread than may be charged by other brokers. Such
research and analysis may be useful to the Adviser in connection with services
to clients other than the funds. The Adviser's fee is not reduced by reason of
its receipt of such brokerage and research services.
From time to time the funds may use Morgan Keegan as broker for agency
transactions in listed and over-the-counter securities at commission rates and
under circumstances consistent with the policy of best execution. The Adviser
will not cause the funds to pay Morgan Keegan any commission for effecting a
securities transaction for the funds in excess of the usual and customary amount
other broker/dealers would have charged for the transaction. Rule 17e-1 under
the 1940 Act defines "usual and customary" commissions to include amounts which
are "reasonable and fair compared to the commission, fee or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time."
The Adviser may also select other brokers to execute portfolio
transactions. In the over-the-counter market, the funds will generally deal with
responsible primary market-makers unless a more favorable execution can
otherwise be obtained through brokers.
The funds may not buy securities from, or sell securities to, Morgan
Keegan as principal. The funds' Board of Directors has adopted procedures in
conformity with Rule 10f-3 under the 1940 Act whereby the funds may purchase
securities that are offered in underwritings in which Morgan Keegan is a
participant.
-32-
<PAGE>
Section 11(a) of the Securities Exchange Act of 1934 prohibits Morgan
Keegan from executing transactions on an exchange for the funds except pursuant
to the provisions of Rule lla2-2(T) thereunder. That rule permits Morgan Keegan,
as a member of a national securities exchange, to perform functions other than
execution in connection with a securities transaction for the funds on that
exchange only if the funds expressly consents by written contract.
Investment decisions for the funds are made independently from those of
other accounts advised by the Adviser. However, the same security may be held in
the portfolios of more that one account. When two or more accounts
simultaneously engage in the purchase or sale of the same security, the prices
and amounts will be equitably allocated among the accounts. In some cases, this
procedure may adversely affect the price or quantity of the security available
to a particular account. In other cases, however, an account's ability to
participate in large volume transactions may produce better executions and
prices.
Morgan Keegan personnel may invest in securities for their own accounts
pursuant to a code of ethics that describes the fiduciary duty owed to
shareholders by all Morgan Keegan directors, officers and employees, establishes
procedures for personal investing and restricts certain transactions. For
example, personal trading in most securities requires pre-clearance. In
addition, the code of ethics places restrictions on the timing of personal
investing in relation to trades by the funds.
DISTRIBUTOR
Morgan Keegan acts as distributor of the funds' shares pursuant to an
Underwriting Agreement between the funds and Morgan Keegan dated as of February
26, 1999 ("Underwriting Agreement"). The shares of the funds are offered
continuously. The Underwriting Agreement obligates Morgan Keegan to provide
certain services and to bear certain expenses in connection with the offering of
each fund's shares, including, but not limited to: printing and distribution of
prospectuses and reports to prospective shareholders; preparation and
distribution of sales literature, and advertising; administrative and overhead
cost of distribution such as the allocable costs of executive office time
expended on developing, managing and operating the distribution program;
operating expenses of branch offices, sales training expenses, and telephone and
other communication expenses. Morgan Keegan compensates investment brokers of
Morgan Keegan and other persons who engage in or support distribution of shares
and shareholder service based on the sales for which they are responsible and
the average daily net asset value of each fund's shares in accounts of their
clients. Morgan Keegan also pays special additional compensation and promotional
incentives from time to time, to investment brokers for sales of fund shares.
Each fund has adopted a Distribution Plan with respect to the Class A
shares and Class C shares (each a "Plan," collectively, the "Plans") pursuant to
Rule 12b-1 under the 1940 Act. Under the Intermediate Fund Rule 12b-1 Plan,
distribution and service fees will be paid at an aggregate annual rate of up to
0.25% for Class A shares, and 0.60% for Class C shares of the fund's average
daily net assets attributable to shares of that class. Under the High Income
Fund Rule 12b-1 Plan, distribution and service fees will be paid at an aggregate
annual rate of up to 0.25% for Class A shares and 0.75% for Class C shares of
the fund's average daily net assets attributable to shares of that class. Class
I shares are not subject to a distribution and service fee.
-33-
<PAGE>
As of June 30, 1999, the Intermediate Fund paid service fees and
distribution fees to Morgan Keegan pursuant to its Rule 12b-1 Plan of $2,462. As
of June 30, 1999, expenses paid for by the Intermediate Fund to Morgan Keegan
included $1,477 for commissions and other compensation to employees, $500 for
printing and mailing, and $250 for promotional materials. As of June 30, 1999,
the High Income Fund paid service fees and distribution fees to Morgan Keegan
pursuant to its Rule 12b-1 Plan of $4,084. As of June 30, 1999, expenses paid
for by the High Income Fund to Morgan Keegan included $2,450 for commissions and
other compensation to employees, $500 for printing and mailing, and $250 for
promotional materials.
Service fees and distribution fees paid by the funds to Morgan Keegan
under the Plans may exceed or be less than Morgan Keegan's expenses thereunder.
No interested person of the funds or non-interested director had a direct or
indirect interest in the Plans or related agreements. The funds benefits from
the Plans by virtue of an ongoing broker's involvement with individual customers
as well as the benefit from continued promotion.
The Plans were approved by the Initial Shareholder on January 13, 1999,
and as required by Rule 12b-1 under the 1940 Act, by the Board of Directors on
November 16, 1998, including a majority of the directors who are not "interested
persons" of the funds, as that term is defined in the 1940 Act and who have no
direct or indirect financial interest in the operation of the Plans or the
Underwriting Agreement (the "Qualified Directors").
In approving the Plans, in accordance with the requirements of Rule
12b-1, the Board of Directors determined that the service and distribution fees
were reasonable in view of the compensation Morgan Keegan investment brokers can
receive relative to the compensation offered by competing bond funds. The Board
of Directors also determined that the fees are reasonable in light of the
service and distribution fees paid by other similar funds. Finally, the Board of
Directors determined that there was a reasonable likelihood that the Plans would
benefit each fund and its shareholders. This determination was based, in part,
on the belief that the Plans enable the funds to have Morgan Keegan investment
brokers available to promote and sell the funds, thereby assisting the funds to
attract assets. Growth of assets is expected to benefit the funds and the
Adviser. The funds are expected to benefit from the potential for economies of
scale in their operations that can arise from growth in assets, as well as from
the increased potential for flexibility in portfolio management resulting from a
net inflow of assets, as opposed to net redemptions. Shareholders of the funds
are expected to benefit from continuing services provided by investment brokers
and other staff members of Morgan Keegan as Distributor. The Adviser and Morgan
Keegan are expected to benefit from the fact that their advisory, service and
distribution fees, which are based on a percentage of assets, increase as fund
assets grow and that their brokerage commissions and transfer fees will also
increase as assets grow. The Board of Directors acknowledged, however, that
there is no assurance that benefits to the funds will be realized as a result of
the Plans.
The Plans may be terminated by vote of a majority of the Qualified
Directors or by vote of a majority of each fund's outstanding voting securities
of the applicable class. Termination of the Plans terminates any obligation of
the funds to pay service and distribution fees to Morgan Keegan, other than
service and distribution fees that may have accrued but that have not been paid
-34-
<PAGE>
as of the date of termination. Any change in the Plans that would materially
increase the service and distribution costs to the funds requires shareholder
approval; otherwise the Plans may be amended by the Directors, including a
majority of the Qualified Directors, as described above.
The Plans, as currently in effect, will continue for successive one-year
periods, provided that each such continuance specifically is approved by (1) the
vote of a majority of the Qualified Directors and (2) the vote of a majority of
the entire Board of Directors of the funds.
Rule 12b-1 requires that any person authorized to direct the disposition
of monies paid or payable by the funds pursuant to the Plan or any related
agreement shall provide to the Board of Directors, and the Directors shall
review, at least quarterly, a written report of the amounts so expended and the
purposes for which expenditures were made. Rule 12b-1 also provides that the
funds may rely on that rule only if the selection and nomination of the fund's
independent directors are committed to the discretion of such independent
directors.
The Underwriting Agreement was approved by vote of the Board of Directors
and the Qualified Directors on November 16, 1998. The Underwriting Agreement is
subject to the same provisions for annual renewal as the Plans. In addition, the
Underwriting Agreement will terminate upon assignment or upon 60 days' notice
from Morgan Keegan. Each fund may terminate the Underwriting Agreement, without
penalty, upon 60 days' notice, by a majority vote of either its Board of
Directors, the Qualified Directors, or the outstanding voting securities of each
fund.
DESCRIPTION OF THE FUNDS' SHARES
The Company is incorporated as a Maryland corporation. The Articles of
Incorporation permit the Board of Directors the right to issue one billion
shares (1,000,000,000), par value of one tenth of one cent ($.001). Under the
Articles of Incorporation, the Directors have the authority to divide or combine
the shares into a greater or lesser number, to classify or reclassify any
unissued shares of the Company into one or more separate series or class of
shares, without further action by the shareholders. As of the date of this SAI,
the Directors have authorized two series of shares (Intermediate Bond Fund and
High Income Fund) and the issuance of three classes of shares of each fund,
designated as Class A, Class C and Class I. Shares are freely transferable and
have no preemptive, subscription or conversion rights. When issued, shares are
fully paid and non-assessable.
The Articles of Incorporation provide that all dividends and distributions
on shares of each series or class will be distributed pro rata to the holders of
that series or class in proportion to the number of shares of that series or
class held by such holders. In calculating the amount of any dividends or
distributions, (1) each class will be charged with the transfer agency fee
attributable to that class, (2) each class will be charged separately with such
other expenses as may be permitted by the SEC and the Board of Directors and (3)
all other fees and expenses shall be charged to the classes, in the proportion
that the net assets of that class bears to the net assets of the applicable
series.
Each class will vote separately on matters pertaining only to that class,
as the Board of Directors may determine. On all other matters, all classes shall
vote together and every share, regardless of class, shall have an equal vote
with every other share. Except as otherwise provided in the Articles of
-35-
<PAGE>
Incorporation, the By-laws of the Company or as required by the provisions of
the 1940 Act, all matters will be decided by a vote of a majority of the
outstanding voting securities validly cast at a meeting at which a quorum is
present. One-third of the aggregate number of shares of that series or class
outstanding and entitled to vote shall constitute a quorum for the transaction
of business by that series or class.
Unless otherwise required by the 1940 Act or the Articles of
Incorporation, the funds have no intention of holding annual meetings of
shareholders. The funds' shareholders may remove a Director by the majority of
all votes of the Company's outstanding shares and the Board of Directors shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 25% of the outstanding shares of each fund.
At least two-thirds of the directors holding office must have been elected by
the shareholders.
CUSTODIAN, TRANSFER AGENT,
DIVIDEND DISBURSING AGENT
AND PORTFOLIO ACCOUNTING SERVICE AGENT
Morgan Keegan & Company, Inc., Morgan Keegan Tower, Fifty Front Street,
Memphis, Tennessee 38103, serves as the transfer and dividend disbursing agent
of each fund. For these services, Morgan Keegan receives from each fund a fee of
$4,000 per month, or $48,000 per year.
Morgan Keegan also provides accounting services to each fund. For these
services, which include portfolio accounting, expense accrual and payment, fund
valuation and financial reporting, tax accounting, and compliance control
services, Morgan Keegan receives from each fund a fee of $1,500 per month, or
$18,000 per year.
The funds reserve the right, upon 60 days' written notice, to make other
charges to investors to cover administrative costs.
State Street Bank and Trust Company, National Association, 108 Myrtle
Street, Quincy, Massachusetts, 02171, serves as the funds' custodian.
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington,
D.C. 20036-1800, serves as counsel to each fund and has passed upon certain
matters in connection with this offering.
CERTIFIED PUBLIC ACCOUNTANTS
KPMG LLP are the fund's independent certified public accountants. The
financial information under the caption "Financial Highlights" in the Prospectus
has been derived from the fund's financial statements contained in the fund's
Annual Report to shareholders for the period ended June 30, 1999 ("Annual
Report"). Those financial statements have been examined by KPMG LLP whose report
thereon also appears in the Annual Report and have been incorporated by
reference in this Statement of Additional Information. KPMG LLP performs an
audit of the fund's financial statements and reviews the fund's federal and
state income tax returns.
-36-
<PAGE>
MORGAN KEEGAN SELECT FUND, INC.
The Financial Statements of the Registrant are incorporated herein by reference
to the Annual Report to Shareholders filed with the Securities and Exchange
Commission on September 9, 1999, EDGAR Accession Number 0001072377-99-000002.
<PAGE>
PART C: OTHER INFORMATION
23. Exhibits:
(a) Articles of Incorporation 1/
(1) Amendment to Articles of Incorporation dated
January 12, 1999 2/
(b) By-laws 2/
(c) Instruments Defining Rights of Security Holders
(1) Articles of Incorporation 1/
(2) Bylaws 2/
(d) Advisory Agreement 2/
(e) Underwriting Agreement 2/
(f) Bonus or Profit Sharing Contracts - none
(g) Custodian Agreement (filed herewith)
(h) Other Material Contracts
(1) Fund Accounting Services Agreement 2/
(2) Transfer Agency and Service Agreement 2/
(i) Legal Opinion (filed herewith)
(j) Other Opinions
(1) Accountants' Consent (filed herewith)
(k) Omitted Financial Statements - none
(l) Initial Capital Agreement 2/
(m) Distribution Plan pursuant to Rule 12b-1 2/
(n) Multiple Class Plan Pursuant to Rule 18f-3 2/
1/ Incorporated by reference to the Registration Statement on Form N-1A,
SEC File No. 333-66181, filed on October 27, 1998.
2/ Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on January 21, 1999.
Item 24.Persons controlled by or under Common Control with Registrant
-------------------------------------------------------------
None.
Item 25.Indemnification
---------------
Section Eleventh of the Articles of Incorporation of the Corporation
states:
Section 11.1. To the maximum extent permitted by applicable law
(including Maryland law and the 1940 Act) as currently in effect or as
it may hereafter be amended, no director or officer of the Corporation
shall be liable to the Corporation or its stockholders for money
damages.
Section 11.2. To the maximum extent permitted by applicable law
(including Maryland law and the 1940 Act) currently in effect or as it
may hereafter be amended, the Corporation shall indemnify and advance
expenses to its present and past directors, officers, or employees, and
persons who are serving or have served at the request of the Corporation
as a director, officer, employee, partner, trustee or agent, of or in
similar capacities, for other entities. The Board of Directors may
determine that the Corporation shall provide information or advance
expenses to an agent.
Section 11.3. Repeal or Modifications. No repeal or modification of this
Article ELEVENTH by the stockholders of the Corporation, or adoption or
modification of any other provision of the Articles of Incorporation or
By-Laws inconsistent with this Article ELEVENTH, shall repeal or narrow
any limitation on (1) the liability of any director, officer or employee
of the Corporation or (2) right of indemnification available to any
person covered by these provisions with respect to any act or omission
which occurred prior to such repeal, modification or adoption.
Section 10.01 of the Bylaws of the Corporation states:
The Corporation shall indemnify each person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (the "Proceeding"), by reason of the fact that he or she
is or was a director, officer or employee of the Corporation, or is or
was serving at the request of the Corporation as a director, officer,
employee, partner, trustee or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against all reasonable
expenses (including attorneys' fees) actually incurred, and judgments,
fines, penalties and amounts paid in settlement in connection with such
Proceeding to the maximum extent permitted by law, now existing or
hereafter adopted.
<PAGE>
Paragraph 7 of the Advisory Agreement between the Corporation and Morgan
Asset Management, Inc. states:
A. Except as provided below, in the absence of willful misfeasance,
bad faith, gross negligence, or reckless disregard of obligations or
duties hereunder on the part of the Adviser, the Adviser shall not be
subject to liability to the Fund or to any shareholder of the Fund or
its Portfolios for any act or omission in the course of, or connected
with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security or the making
of any investment for or on behalf of the Fund.
B. No provision of this Agreement shall be construed to protect any
Director or officer of the Fund, or the Adviser, from liability in
violation of Sections 17(h), 17(i), 36(a) or 36(b) of the 1940 Act.
Paragraphs 7 and 8 of the Underwriting Agreement between the Corporation
and Morgan Keegan & Company, Inc. state:
7. The Fund agrees to indemnify, defend and hold the Distributor,
its several officers and directors, and any person who controls the
Distributor within the meaning of Section 15 of the 1933 Act, free and
harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection
therewith) which the Distributor, its officers or directors, or any such
controlling person may incur, under the 1933 Act or under common law or
otherwise, arising out of or based upon any alleged untrue statement of
a material fact contained in the Registration Statement or arising out
of or based upon any alleged omission to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided, however, that the Fund shall not indemnify or
defend such persons or hold them harmless with respect to any claims,
demands, or liabilities based on information provided to the Fund by the
Distributor; and provided further that this indemnification provision
shall not inure to the benefit of any person who is an officer or
director of the Fund or who controls the Fund within the meaning of
Section 15 of the 1933 Act, as amended, unless a court of competent
jurisdiction shall determine, or it shall have been determined by
controlling precedent, that such result would not be against public
policy as expressed in the 1933 Act, as amended, and further provided
that in no event shall anything contained in this Agreement be construed
so as to protect the Distributor against any liability to the Fund or
its shareholders to which the Distributor would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement.
8. The Distributor agrees to indemnify, defend and hold the Fund,
its several officers and directors, and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act, free and harmless from
and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith)
which the Fund, its officers or directors, or any such controlling
person may incur, under the 1933 Act or under common law or otherwise,
arising out of or based upon any alleged untrue statement of a material
fact contained in information furnished in writing by the Distributor to
the Fund for use in the Registration Statement or arising out of or
based upon any alleged omission by the Distributor to state a material
fact in connection with such information required to be stated in the
Registration Statement or necessary to make such information not
misleading.
Paragraph 3 of the Fund Accounting Service Agreement between Morgan
Keegan & Company, Inc. and Morgan Keegan Select Fund, Inc. states:
Responsibility of Morgan Keegan & Company, Inc. Morgan Keegan
shall be held to the exercise of reasonable care in carrying out the
provisions of this Agreement, but shall be indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in
good faith without negligence or willful misconduct. Morgan Keegan shall
be entitled to rely on and may act upon the reasonable advice of the
Fund's auditors or of counsel (who may be counsel of the Fund) on all
matters, and shall not be liable for any action reasonably taken or
omitted pursuant to such advice.
In addition, Morgan Keegan shall not be liable for any loss of data or
any delay in its performance under this Agreement to the extent such
loss or delay is due to causes beyond its control, including but not
limited to: acts of God, interruption in, loss of or malfunction in
power, significant computer hardware or systems software or telephone
communication service; acts of civil or military authority; sabotage;
war or civil commotion; fire; explosion; or strike beyond delivery of
minimum critical services. Morgan Keegan shall use its best efforts to
minimize any such loss or delay by all practical means and to replace
any lost data promptly. Morgan Keegan agrees not to discriminate against
the Fund in favor of any other customer of Morgan Keegan in making
computer time and its personnel available to input and process the
transactions hereunder when a loss or delay occurs.
Paragraph 10 of the Transfer Agency and Service Agreement between the
Corporation and Morgan Keegan & Company, Inc. states:
RESPONSIBILITY OF MORGAN KEEGAN; LIMITATION OF LIABILITY. Morgan
Keegan shall be held to the exercise of reasonable care in carrying out
the provisions of this Agreement, but the Fund shall indemnify and hold
Morgan Keegan harmless against any losses, claims, damages, liabilities
or expenses (including reasonable counsel fees and expenses) resulting
from any claim, demand, action or suit brought by any person (including
a shareholder naming the Fund as a party) other than the Fund arising
out of, or in connection with, Morgan Keegan's performance of its
obligations hereunder, provided, that Morgan Keegan does not act with
bad faith, willful misfeasance, reckless disregard of its obligations
and duties, or gross negligence.
The Fund shall also indemnify and hold Morgan Keegan harmless against
any losses, claims, damages, liabilities or expenses (including
reasonable counsel fees and expenses) resulting from any claim, demand,
action or suit (except to the extent contributed to by Morgan Keegan's
bad faith, willful misfeasance, reckless disregard of its obligations
and duties, or gross negligence) resulting from the negligence of the
Fund, or Morgan Keegan's acting upon any instructions reasonably
believed by it to have been executed or communicated by any person duly
authorized by the Fund, or as a result of Morgan Keegan's acting in
reliance upon advice reasonably believed by Morgan Keegan to have been
given by counsel for the Fund, or as a result of Morgan Keegan's acting
in reliance upon any instrument reasonably believed by it to have been
genuine and signed, countersigned or executed by the proper person.
In no event shall Morgan Keegan be liable for indirect, special, or
consequential damages (even if Morgan Keegan has been advised of the
possibility of such damages) arising from the obligations assumed
hereunder and the services provided for by this Agreement, including but
not limited to lost profits, loss of use of the shareholder accounting
system, cost of capital, cost of substitute facilities, programs or
services, downtime costs, or claims of the Fund's shareholders for such
damage.
Item 26.Business and Other Connections of Investment Adviser
----------------------------------------------------
Morgan Asset Management, Inc., a Tennessee corporation, is a registered
investment adviser and offers investment management services to investment
companies and other types of investors. Information as to its officers and
directors is included in its Form ADV filed on October 21, 1998 with the
Securities and Exchange Commission (registration number 801-27629) and is
incorporated herein by reference.
Item 27.Principal Underwriter
---------------------
(a) Bedford Money Market Fund
Morgan Keegan Southern Capital Fund, Inc.
(b) Morgan Keegan & Company, Inc.
Name and Positions and Positions and
Principal Business Offices With Offices With
Address Underwriter Registrant
- ------------------ ------------- --------------
(Principal Business Address,
unless otherwise noted, is:
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103)
Allen B. Morgan, Jr. Chairman and Director,
Chief Executive President
Officer, Executive
Managing Director
Joseph C. Weller Chief Financial Vice President,
Officer, Executive Treasurer and
Managing Director, Assistant Secretary
Executive Vice President,
Secretary and Treasurer
John W. Stokes, Jr. Vice Chairman, None
Executive Managing
Director
Robert A. Baird Executive None
Managing Director
<PAGE>
G. Douglas Edwards Executive Managing None
Director
James H. Ganier Executive Managing None
Director
Stephen P. Laffey Executive Managing None
Director
Thomas V. Orr Executive Managing None
Director
James A. Parish, Jr. Executive Managing None
Director
Allen B. Adler Managing Director None
Franklin P. Allen, III Managing Director None
George E. Arras, Jr. Managing Director None
James M. Augustine Managing Director None
Joseph K. Ayers Managing Director None
Rodney D. Baber, Jr. Managing Director None
George E. Bagwell Managing Director None
Woodley H. Bagwell Managing Director None
Charles E. Bailey Managing Director None
Milton A. Barber Managing Director None
Joseph C. Barkley Managing Director None
Reginald E. Barnes Managing Director None
Glen E. Bascom Managing Director None
W. Preston Battle Managing Director None
Robert C. Berry Managing Director None
Cristan K. Blackman Managing Director None
John D. Brewer Managing Director None
Paul S. Burd Managing Director None
John B. Carr, Jr. Managing Director None
John C. Carson, Jr. Managing Director None
Ted H. Cashion Managing Director None
Marshall A. Clark Managing Director None
William F. Clay Managing Director None
Robert E. Cope Managing Director None
Mark W. Crowl Managing Director None
<PAGE>
Harold L. Deaton Managing Director None
William W. Deupree, Jr. Managing Director None
Robert H. Dudley, Jr. Managing Director None
Richard H. Eckels Managing Director None
Richard S. Ferguson Managing Director None
Robert M. Fockler Managing Director None
Wilmer J. Freiberg Managing Director None
Graham D.S. Fulton Managing Director None
John H. Geary Managing Director None
Robert D. Gooch, Jr. Managing Director None
James F. Gould Managing Director None
Terry C. Graves Managing Director None
John H. Grayson, Jr. Managing Director None
Gary W. Guinn Managing Director None
David M. Guthrie Managing Director None
Jan L. Gwin Managing Director None
Thomas M. Hahn Managing Director None
Thomas V. Harkins Managing Director None
Michael J. Harris Managing Director None
Haywood Henderson Managing Director None
Roderick E. Hennek Managing Director None
Edwin L. Hoopes, III Managing Director None
R. Davis Howe Managing Director None
William F. Hughes, Jr. Managing Director Director
Joe R. Jennings Managing Director None
Robert Jetmundsen Managing Director None
Ram P. Kasargod Managing Director None
Peter R. Klyce Managing Director None
Peter Stephen Knoop Managing Director None
W. Lawrence M. Knox, Jr. Managing Director None
E. Carl Krausnick, Jr. Managing Director None
James R. Ladyman Managing Director None
<PAGE>
A. Welling LaGrone, Jr. Managing Director None
Benton G. Landers Managing Director None
William M. Lellyett, Jr. Managing Director None
W. G. Logan, Jr. Managing Director None
Wiley H. Malden Managing Director None
John Henry Martin Managing Director None
William D. Mathis, III Managing Director None
John Fox Matthews Managing Director None
Francis J. Maus Managing Director None
Charles D. Maxwell Managing Director Secretary and
Assistant Treasurer
John Welsh Mayer Managing Director None
W. Neal McAtee Managing Director None
Harris L. McCraw III Managing Director None
Edward S. Michelson Managing Director None
G. Rolfe Miller Managing Director None
Gary C. Mills Managing Director None
David Montague Managing Director None
Robert M. Montague Managing Director None
K. Brooks Monypeny Managing Director None
John G. Moss Managing Director None
Lewis A. Moyse Managing Director None
William G. Mueller Managing Director None
Mortimer S. Neblett Managing Director None
Philip G. Nichols Managing Director None
Michael O'Keefe Managing Director None
Jack A. Paratore Managing Director None
William T. Patterson Managing Director None
J. Christopher Perkins Managing Director None
Minor Perkins Managing Director None
Logan B. Phillips, Jr. Managing Director None
L. Jack Powell Managing Director None
S. Mark Powell Managing Director None
<PAGE>
Richard L. Preis Managing Director None
C. David Ramsey Managing Director None
Hedi H. Reynolds Managing Director None
Donna L. Richardson Managing Director None
R. Michael Ricketts Managing Director None
Thomas E. Robinson, Sr. Managing Director None
Darien M. Roche Managing Director None
Kenneth L. Rowland Managing Director None
W. Wendell Sanders Managing Director None
E. Elkan Scheidt Managing Director None
Ronald J. Schuberth Managing Director None
Lynn T. Shaw Managing Director None
Fred B. Smith Managing Director None
Richard J. Smith Managing Director None
Robert L. Snider Managing Director None
John B. Snowden, IV Managing Director None
Thomas A. Snyder Managing Director None
Rick A. Spell Managing Director None
John W. Stokes, III Managing Director None
John Burke Strange Managing Director None
James M. Tait, III Managing Director None
J. Crosby Taylor, Jr. Managing Director None
Phillip C. Taylor Managing Director None
John D. Threadgill Managing Director None
P. Gibbs Vestal Managing Director None
Edmund J. Wall Managing Director None
W. Charles Warner Managing Director None
Richard E. Watson Managing Director None
Craig T. Weichmann Managing Director None
John S. Wilson Managing Director None
J. William Wyker III Managing Director None
John J. Zollinger, III Managing Director None
<PAGE>
(c) None
Item 28.Location of Accounts and Records
--------------------------------
The books and other documents required by paragraphs (b)(4), (c) and (d)
of Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Registrant's adviser, Morgan Asset Management, Inc.,
Morgan Keegan Tower, Fifty Front Street, Memphis, Tennessee 38103. All other
accounts, books and other documents required by Rule 31a-1 are maintained in the
physical possession of Registrant's transfer agent and portfolio accounting
service provider, Morgan Keegan & Co., Morgan Keegan Tower, Fifty Front Street,
Memphis, Tennessee 38103.
Item 29.Management Services
-------------------
Not applicable
Item 30.Undertakings - none
------------
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Morgan Keegan Select Fund, Inc.,
certifies that it meets all the requirements for effectiveness of this
Post-Effective Amendment No. 1 to its Registration Statement on Form N-1A under
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No. 1 to its Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Memphis and State of Tennessee, on the 25th day of October, 1999.
MORGAN KEEGAN SELECT FUND, INC.
By: /s/ Allen B. Morgan, Jr.
-------------------------------------
Allen B. Morgan, Jr., President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ Allen B. Morgan, Jr. Director and President October 25, 1999
- ------------------------ (Chief Executive
Allen B. Morgan, Jr. Officer)
/s/ Joseph C. Weller Vice President and October 25, 1999
- -------------------- Treasurer (Chief
Joseph C. Weller Financial Officer)
/s/ James D. Witherington, Jr. Director October 25, 1999
- ------------------------------
James D. Witherington, Jr.
/s/ William F. Hughes, Jr. Director October 25, 1999
- --------------------------
William F. Hughes, Jr.
/s/ William Jefferies Mann Director October 25, 1999
- --------------------------
William Jefferies Mann
/s/ James Stillman R. McFadden Director October 25, 1999
- ------------------------------
James Stillman R. McFadden
<PAGE>
MORGAN KEEGAN SELECT FUND, INC.
Exhibit Index
(a) Articles of Incorporation 1/
(1) Amendment to Articles of Incorporation dated
January 12, 1999 2/
(b) By-laws 2/
(c) Instruments Defining Rights of Security Holders
(1) Articles of Incorporation 1/
(2) Bylaws 2/
(d) Advisory Agreement 2/
(e) Underwriting Agreement 2/
(f) Bonus or Profit Sharing Contracts - none
(g) Custodian Agreement (filed herewith)
(h) Other Material Contracts
(1) Fund Accounting Services Agreement 2/
(2) Transfer Agency and Services Agreement 2/
(i) Legal Opinion (filed herewith)
(j) Other Opinions
(1) Accountants' Consent (filed herewith)
(k) Omitted Financial Statements - none
(l) Initial Capital Agreement 2/
(m) Distribution Plan pursuant to Rule 12b-1 2/
(n) Multiple Class Plan Pursuant to Rule 18f-3 2/
1/ Incorporated by reference to the Registration Statement on Form N-1A,
SEC File No. 333-66181, filed on October 27, 1998.
2/ Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on January 21, 1999.
EXHIBIT G
CUSTODIAN AGREEMENT
This Agreement between and MORGAN KEEGAN SELECT FUND, INC. a corporation
organized and existing under the laws of Maryland (the "FUND"), and STATE STREET
BANK and TRUST COMPANY, a Massachusetts trust company (the "CUSTODIAN"),
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Fund intends that this Agreement be applicable to all
existing series (such series together with all other series subsequently
established by the Fund and made subject to this Agreement in accordance with
Section 18, referred to herein as the "PORTFOLIO(S)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
SECTION 1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT. The Fund
hereby employs the Custodian as the custodian of the assets of the Portfolios of
the Fund, including securities which the Fund, on behalf of the applicable
Portfolio desires to be held in places within the United States ("DOMESTIC
SECURITIES") and securities it desires to be held outside the United States
("FOREIGN SECURITIES"). The Fund on behalf of the Portfolio(s) agrees to deliver
to the Custodian all securities and cash of the Portfolios, and all payments of
income, payments of principal or capital distributions received by it with
respect to all securities owned by the Portfolio(s) from time to time, and the
cash consideration received by it for such new or treasury shares of beneficial
interest of the Fund representing interests in the Portfolios ("SHARES") as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of a Portfolio held or received by the Portfolio and not delivered
to the Custodian.
Upon receipt of "PROPER INSTRUCTIONS" (as such term is defined in
Section 6 hereof), the Custodian shall on behalf of the applicable Portfolio(s)
from time to time employ one or more sub-custodians located in the United
States, but only in accordance with an applicable vote by the Board of Directors
of the Fund (the "BOARD") on behalf of the applicable Portfolio(s), and provided
that the Custodian shall have no more or less responsibility or liability to the
Fund on account of any actions or omissions of any sub-custodian so employed
than any such sub-custodian has to the Custodian. The Custodian may employ as
sub-custodian for the Fund's foreign securities on behalf of the applicable
Portfolio(s) the foreign banking institutions and foreign securities
depositories designated in Schedules A and B hereto but only in accordance with
the applicable provisions of Sections 3 and 4.
SECTION 2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND
HELD BY THE CUSTODIAN IN THE UNITED STATES
SECTION 2.1 HOLDING SECURITIES. The Custodian shall hold and physically
segregate for the account of each Portfolio all non-cash property, to be held by
<PAGE>
it in the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to Section
2.8 in a clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the Treasury (each, a
"U.S. SECURITIES SYSTEM") and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("DIRECT PAPER")
which is deposited and/or maintained in the Direct Paper System of the Custodian
(the "DIRECT PAPER SYSTEM") pursuant to Section 2.9.
SECTION 2.2 DELIVERY OF SECURITIES. The Custodian shall release and
deliver domestic securities owned by a Portfolio held by the Custodian or in a
U.S. Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("DIRECT PAPER SYSTEM ACCOUNT") only upon
receipt of Proper Instructions on behalf of the applicable Portfolio, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the
Portfolio;
3) In the case of a sale effected through a U.S. Securities System,
in accordance with the provisions of Section 2.8 hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is to be
delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name
of the Portfolio or into the name of any nominee or nominees of
the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.7 or into the name or nominee
name of any sub-custodian appointed pursuant to Section 1; or for
exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of
units; provided that, in any such case, the new securities are to
be delivered to the Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, the Custodian shall have
no responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
<PAGE>
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered to
the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that, in
any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of securities made by
the Portfolio, BUT ONLY against receipt of adequate collateral as
agreed upon from time to time by the Custodian and the Fund on
behalf of the Portfolio, which may be in the form of cash or
obligations issued by the United States government, its agencies
or instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's account
in the book-entry system authorized by the U.S. Department of the
Treasury, the Custodian will not be held liable or responsible
for the delivery of securities owned by the Portfolio prior to
the receipt of such collateral;
11) For delivery as security in connection with any borrowing by the
Fund on behalf of the Portfolio requiring a pledge of assets by
the Fund on behalf of the Portfolio, BUT ONLY against receipt of
amounts borrowed;
12) For delivery in accordance with the provisions of any agreement
among the Fund on behalf of the Portfolio, the Custodian and a
broker-dealer registered under the Securities Exchange Act of
1934 (the "EXCHANGE ACT") and a member of The National
Association of Securities Dealers, Inc. ("NASD"), relating to
compliance with the rules of The Options Clearing Corporation and
of any registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Portfolio of
the Fund;
13) For delivery in accordance with the provisions of any agreement
among the Fund on behalf of the Portfolio, the Custodian, and a
futures commission merchant registered under the Commodity
Exchange Act, relating to compliance with the rules of the
Commodity Futures Trading Commission ("CFTC") and/or any contract
market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the Portfolio
of the Fund;
14) Upon receipt of instructions from the transfer agent for the Fund
(the "TRANSFER AGENT") for delivery to such Transfer Agent or to
the holders of Shares in connection with distributions in kind,
as may be described from time to time in the currently effective
prospectus and statement of additional information of the Fund
related to the Portfolio (the "PROSPECTUS"), in satisfaction of
requests by holders of Shares for repurchase or redemption; and
15) For any other proper purpose, BUT ONLY upon receipt of Proper
Instructions from the Fund on behalf of the applicable Portfolio
specifying the securities of the Portfolio to be delivered,
setting forth the purpose for which such delivery is to be made,
<PAGE>
declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such securities
shall be made.
SECTION 2.3 REGISTRATION OF SECURITIES. Domestic securities held by the
Custodian (other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the Portfolio
or of any nominee of the Custodian which nominee shall be assigned exclusively
to the Portfolio, unless the Fund has authorized in writing the appointment of a
nominee to be used in common with other registered investment companies having
the same investment adviser as the Portfolio, or in the name or nominee name of
any agent appointed pursuant to Section 2.7 or in the name or nominee name of
any sub-custodian appointed pursuant to Section 1. All securities accepted by
the Custodian on behalf of the Portfolio under the terms of this Agreement shall
be in "street name" or other good delivery form. If, however, the Fund directs
the Custodian to maintain securities in "street name", the Custodian shall
utilize its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency of calls, maturities,
tender or exchange offers.
SECTION 2.4 BANK ACCOUNTS. The Custodian shall open and maintain a
separate bank account or accounts in the United States in the name of each
Portfolio of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Agreement, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it from or for
the account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940, as amended (the "1940 ACT"). Funds held by the
Custodian for a Portfolio may be deposited by it to its credit as Custodian in
the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable; provided,
however, that every such bank or trust company shall be qualified to act as a
custodian under the 1940 Act and that each such bank or trust company and the
funds to be deposited with each such bank or trust company shall on behalf of
each applicable Portfolio be approved by vote of a majority of the Board. Such
funds shall be deposited by the Custodian in its capacity as Custodian and shall
be withdrawable by the Custodian only in that capacity.
SECTION 2.5 COLLECTION OF INCOME. Subject to the provisions of Section
2.3, the Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and other
payments with respect to bearer domestic securities if, on the date of payment
by the issuer, such securities are held by the Custodian or its agent thereof
and shall credit such income, as collected, to such Portfolio's custodian
account. Without limiting the generality of the foregoing, the Custodian shall
detach and present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest when due on
securities held hereunder. Income due each Portfolio on securities loaned
pursuant to the provisions of Section 2.2 (10) shall be the responsibility of
the Fund. The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Fund with such information or data as may
be necessary to assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Portfolio is properly entitled.
<PAGE>
SECTION 2.6 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions
on behalf of the applicable Portfolio, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out monies of a
Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of the
Portfolio but only (a) against the delivery of such securities or
evidence of title to such options, futures contracts or options
on futures contracts to the Custodian (or any bank, banking firm
or trust company doing business in the United States or abroad
which is qualified under the 1940 Act to act as a custodian and
has been designated by the Custodian as its agent for this
purpose) registered in the name of the Portfolio or in the name
of a nominee of the Custodian referred to in Section 2.3 hereof
or in proper form for transfer; (b) in the case of a purchase
effected through a U.S. Securities System, in accordance with the
conditions set forth in Section 2.8 hereof; (c) in the case of a
purchase involving the Direct Paper System, in accordance with
the conditions set forth in Section 2.9; (d) in the case of
repurchase agreements entered into between the Fund on behalf of
the Portfolio and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery of
the securities either in certificate form or through an entry
crediting the Custodian's account at the Federal Reserve Bank
with such securities or (ii) against delivery of the receipt
evidencing purchase by the Portfolio of securities owned by the
Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Portfolio or (e)
for transfer to a time deposit account of the Fund in any bank,
whether domestic or foreign; such transfer may be effected prior
to receipt of a confirmation from a broker and/or the applicable
bank pursuant to Proper Instructions from the Fund as defined
herein;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued as set forth in
Section 5 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments
for the account of the Portfolio: interest, taxes, management,
accounting, transfer agent and legal fees, and operating expenses
of the Fund whether or not such expenses are to be in whole or
part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares declared pursuant to
the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, BUT ONLY upon receipt of Proper
Instructions from the Fund on behalf of the Portfolio specifying
the amount of such payment, setting forth the purpose for which
such payment is to be made, declaring such purpose to be a proper
<PAGE>
corporate purpose, and naming the person or persons to whom such
payment is to be made.
SECTION 2.7 APPOINTMENT OF AGENTS. The Custodian may at any time or
times in its discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the 1940 Act to act as a
custodian, as its agent to carry out such of the provisions of this Section 2 as
the Custodian may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian of its responsibilities
or liabilities hereunder.
SECTION 2.8 DEPOSIT OF FUND ASSETS IN U.S. SECURITIES SYSTEMS. The
Custodian may deposit and/or maintain securities owned by a Portfolio in a U.S.
Securities System subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are represented
in an account of the Custodian in the U.S. Securities System (the
"U.S. SECURITIES SYSTEM ACCOUNT") which account shall not include
any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the
Portfolio;
3) The Custodian shall pay for securities purchased for the account
of the Portfolio upon (i) receipt of advice from the U.S.
Securities System that such securities have been transferred to
the U.S. Securities System Account, and (ii) the making of an
entry on the records of the Custodian to reflect such payment and
transfer for the account of the Portfolio. The Custodian shall
transfer securities sold for the account of the Portfolio upon
(i) receipt of advice from the U.S. Securities System that
payment for such securities has been transferred to the U.S.
Securities System Account, and (ii) the making of an entry on the
records of the Custodian to reflect such transfer and payment for
the account of the Portfolio. Copies of all advices from the U.S.
Securities System of transfers of securities for the account of
the Portfolio shall identify the Portfolio, be maintained for the
Portfolio by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish the Fund on
behalf of the Portfolio confirmation of each transfer to or from
the account of the Portfolio in the form of a written advice or
notice and shall furnish to the Fund on behalf of the Portfolio
copies of daily transaction sheets reflecting each day's
transactions in the U.S. Securities System for the account of the
Portfolio;
4) The Custodian shall provide the Fund with any report obtained by
the Custodian on the U.S. Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the U.S. Securities System;
<PAGE>
5) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the
Portfolio for any loss or damage to the Portfolio resulting from
use of the U.S. Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of its agents
or of any of its or their employees or from failure of the
Custodian or any such agent to enforce effectively such rights as
it may have against the U.S. Securities System; at the election
of the Fund, it shall be entitled to be subrogated to the rights
of the Custodian with respect to any claim against the U.S.
Securities System or any other person which the Custodian may
have as a consequence of any such loss or damage if and to the
extent that the Portfolio has not been made whole for any such
loss or damage.
SECTION 2.9 FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM. The
Custodian may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions from the
Fund on behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct
Paper System only if such securities are represented in the
Direct Paper System Account, which account shall not include any
assets of the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the
Portfolio;
4) The Custodian shall pay for securities purchased for the account
of the Portfolio upon the making of an entry on the records of
the Custodian to reflect such payment and transfer of securities
to the account of the Portfolio. The Custodian shall transfer
securities sold for the account of the Portfolio upon the making
of an entry on the records of the Custodian to reflect such
transfer and receipt of payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the
Portfolio, in the form of a written advice or notice, of Direct
Paper on the next business day following such transfer and shall
furnish to the Fund on behalf of the Portfolio copies of daily
transaction sheets reflecting each day's transaction in the
Direct Paper System for the account of the Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio
with any report on its system of internal accounting control as
the Fund may reasonably request from time to time.
SECTION 2.10 SEGREGATED ACCOUNT. The Custodian shall upon receipt of
Proper Instructions on behalf of each applicable Portfolio establish and
<PAGE>
maintain a segregated account or accounts for and on behalf of each such
Portfolio, into which account or accounts may be transferred cash and/or
securities, including securities maintained in an account by the Custodian
pursuant to Section 2.8 hereof, (i) in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the NASD (or any
futures commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing Corporation and of
any registered national securities exchange (or the CFTC or any registered
contract market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the Portfolio,
(ii) for purposes of segregating cash or government securities in connection
with options purchased, sold or written by the Portfolio or commodity futures
contracts or options thereon purchased or sold by the Portfolio, (iii) for the
purposes of compliance by the Portfolio with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release of the SEC,
or interpretative opinion of the staff of the SEC, relating to the maintenance
of segregated accounts by registered investment companies and (iv) for other
proper corporate purposes, but only, in the case of clause (iv), upon receipt of
Proper Instructions from the Fund on behalf of the applicable Portfolio, setting
forth the purpose or purposes of such segregated account and declaring such
purpose(s) to be a proper corporate purpose.
SECTION 2.11 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian
shall execute ownership and other certificates and affidavits for all federal
and state tax purposes in connection with receipt of income or other payments
with respect to domestic securities of each Portfolio held by it and in
connection with transfers of securities.
SECTION 2.12 PROXIES. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting materials
and all notices relating to such securities.
SECTION 2.13 COMMUNICATIONS RELATING TO PORTFOLIO SECURITIES. Subject to
the provisions of Section 2.3, the Custodian shall transmit promptly to the Fund
for each Portfolio all written information (including, without limitation,
pendency of calls and maturities of domestic securities and expirations of
rights in connection therewith and notices of exercise of call and put options
written by the Fund on behalf of the Portfolio and the maturity of futures
contracts purchased or sold by the Portfolio) received by the Custodian from
issuers of the securities being held for the Portfolio. With respect to tender
or exchange offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Portfolio desires to take action with respect
to any tender offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian at least three business days prior to the
date on which the Custodian is to take such action.
SECTION 3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER OF THE PORTFOLIOS
<PAGE>
SECTION 3.1 DEFINITIONS. The following capitalized terms shall have
the indicated meanings:
"COUNTRY RISK" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure
(including any Mandatory Securities Depositories operating in the country);
prevailing or developing custody and settlement practices; and laws and
regulations applicable to the safekeeping and recovery of Foreign Assets held in
custody in that country.
"ELIGIBLE FOREIGN CUSTODIAN" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the SEC), or a foreign branch of a Bank (as defined in Section 2(a)(5)
of the 1940 Act) meeting the requirements of a custodian under Section 17(f) of
the 1940 Act, except that the term does not include Mandatory Securities
Depositories.
"FOREIGN ASSETS" means any of the Portfolios' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Portfolios'
transactions in such investments.
"FOREIGN CUSTODY MANAGER" has the meaning set forth in section (a)(2) of Rule
17f-5.
"MANDATORY SECURITIES DEPOSITORY" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if
Fund, on the Portfolios' behalf, determines to place Foreign Assets in a country
outside the United States (i) because required by law or regulation; (ii)
because securities cannot be withdrawn from such foreign securities depository
or clearing agency; or (iii) because maintaining or effecting trades in
securities outside the foreign securities depository or clearing agency is not
consistent with prevailing or developing custodial or market practices.
SECTION 3.2 DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. The
Fund, by resolution adopted by the Board, hereby delegates to the Custodian with
respect to the Portfolios, subject to Section (b) of Rule 17f-5, the
responsibilities set forth in this Section 3 with respect to Foreign Assets of
the Portfolios held outside the United States, and the Custodian hereby accepts
such delegation, as Foreign Custody Manager with respect to the Portfolios.
SECTION 3.3 COUNTRIES COVERED. The Foreign Custody Manager shall be
responsible for performing the delegated responsibilities defined below only
with respect to the countries and custody arrangements for each such country
listed on Schedule A to this Agreement, which list of countries may be amended
from time to time by the Fund with the Agreement of the Foreign Custody Manager.
The Foreign Custody Manager shall list on Schedule A the Eligible Foreign
Custodians selected by the Foreign Custody Manager to maintain the assets of the
Portfolios, which list of Eligible Foreign Custodians may be amended from time
to time in the sole discretion of the Foreign Custody Manager. Mandatory
Securities Depositories are listed on Schedule B to this Contract, which
Schedule B may be amended from time to time by the Foreign Custody Manager. The
Foreign Custody Manager will provide amended versions of Schedules A and B in
accordance with Section 3.7 hereof.
<PAGE>
Upon the receipt by the Foreign Custody Manager of Proper Instructions
to open an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by the Fund on behalf of the Portfolios of the
applicable account opening requirements for such country, the Foreign Custody
Manager shall be deemed to have been delegated by the Board on behalf of the
Portfolios responsibility as Foreign Custody Manager with respect to that
country and to have accepted such delegation. Following the receipt of Proper
Instructions directing the Foreign Custody Manager to close the account of a
Portfolio with the Eligible Foreign Custodian selected by the Foreign Custody
Manager in a designated country, the delegation by the Board on behalf of the
Portfolios to the Custodian as Foreign Custody Manager for that country shall be
deemed to have been withdrawn and the Custodian shall immediately cease to be
the Foreign Custody Manager of the Portfolios with respect to that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
SECTION 3.4 SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS. Subject to the
provisions of this Section 3, the Portfolios' Foreign Custody Manager may place
and maintain the Foreign Assets in the care of the Eligible Foreign Custodian
selected by the Foreign Custody Manager in each country listed on Schedule A, as
amended from time to time. In performing its delegated responsibilities as
Foreign Custody Manager to place or maintain Foreign Assets with an Eligible
Foreign Custodian, the Foreign Custody Manager shall determine that the Foreign
Assets will be subject to reasonable care, based on the standards applicable to
custodians in the country in which the Foreign Assets will be held by that
Eligible Foreign Custodian, after considering all factors relevant to the
safekeeping of such assets, including, without limitation the factors specified
in Rule 17f-5(c)(1).
3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS. The Foreign Custody
Manager shall determine that the contract (or the rules or established practices
or procedures in the case of an Eligible Foreign Custodian that is a foreign
securities depository or clearing agency) governing the foreign custody
arrangements with each Eligible Foreign Custodian selected by the Foreign
Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3. MONITORING. In each case in which the Foreign Custody Manager
maintains Foreign Assets with an Eligible Foreign Custodian selected by the
Foreign Custody Manager, the Foreign Custody Manager shall establish a system to
monitor (i) the appropriateness of maintaining the Foreign Assets with such
Eligible Foreign Custodian and (ii) the contract governing the custody
arrangements established by the Foreign Custody Manager with the Eligible
Foreign Custodian (or the rules or established practices and procedures in the
case of an Eligible Foreign Custodian selected by the Foreign Custody Manager
which is a foreign securities depository or clearing agency that is not a
Mandatory Securities Depository). In the event the Foreign Custody Manager
determines that the custody arrangements with an Eligible Foreign Custodian it
<PAGE>
has selected are no longer appropriate, the Foreign Custody Manager shall notify
the Board in accordance with Section 3.7 hereunder.
SECTION 3.5 GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY. For
purposes of this Section 3, the Board shall be deemed to have considered and
determined to accept such Country Risk as is incurred by placing and maintaining
the Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund, on behalf of the Portfolios, and
the Board shall be deemed to be monitoring on a continuing basis such Country
Risk to the extent that the Board considers necessary or appropriate. The Fund
and the Custodian each expressly acknowledge that the Foreign Custody Manager
shall not be delegated any responsibilities under this Section 3 with respect to
Mandatory Securities Depositories.
SECTION 3.6 STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF THE
PORTFOLIOS. In performing the responsibilities delegated to it, the Foreign
Custody Manager agrees to exercise reasonable care, prudence and diligence such
as a person having responsibility for the safekeeping of assets of management
investment companies registered under the 1940 Act would exercise.
SECTION 3.7 REPORTING REQUIREMENTS. The Foreign Custody Manager shall
report the withdrawal of the Foreign Assets from an Eligible Foreign Custodian
and the placement of such Foreign Assets with another Eligible Foreign Custodian
by providing to the Board amended Schedules A or B at the end of the calendar
quarter in which an amendment to either Schedule has occurred. The Foreign
Custody Manager shall make written reports notifying the Board of any other
material change in the foreign custody arrangements of the Portfolios described
in this Section 3 after the occurrence of the material change.
SECTION 3.8 REPRESENTATIONS WITH RESPECT TO RULE 17f-5. The Foreign
Custody Manager represents to the Fund that it is a U.S. Bank as defined in
section (a)(7) of Rule 17f-5. The Fund represents to the Custodian that the
Board has determined that it is reasonable for the Board to rely on the
Custodian to perform the responsibilities delegated pursuant to this Agreement
to the Custodian as the Foreign Custody Manager of the Portfolios.
SECTION 3.9 EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN
CUSTODY MANAGER. The Board's delegation to the Custodian as Foreign Custody
Manager of the Portfolios shall be effective as of the date of execution of this
Agreement and shall remain in effect until terminated at any time, without
penalty, by written notice from the terminating party to the non-terminating
party. Termination will become effective thirty (30) days after receipt by the
non-terminating party of such notice. The provisions of Section 3.3 hereof shall
govern the delegation to and termination of the Custodian as Foreign Custody
Manager of the Portfolios with respect to designated countries.
SECTION 4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE
PORTFOLIOS HELD OUTSIDE OF THE UNITED STATES
SECTION 4.1 DEFINITIONS. Capitalized terms in this Section 4 shall have
the following meanings:
<PAGE>
"FOREIGN SECURITIES SYSTEM" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"FOREIGN SUB-CUSTODIAN" means a foreign banking institution serving as an
Eligible Foreign Custodian.
SECTION 4.2 HOLDING SECURITIES. The Custodian shall identify on its
books as belonging to the Portfolios the foreign securities held by each Foreign
Sub-Custodian or Foreign Securities System. The Custodian may hold foreign
securities for all of its customers, including the Portfolios, with any Foreign
Sub-Custodian in an account that is identified as belonging to the Custodian for
the benefit of its customers, provided however, that (i) the records of the
Custodian with respect to foreign securities of the Portfolios which are
maintained in such account shall identify those securities as belonging to the
Portfolios and (ii), to the extent permitted and customary in the market in
which the account is maintained, the Custodian shall require that securities so
held by the Foreign Sub-Custodian be held separately from any assets of such
Foreign Sub-Custodian or of other customers of such Foreign Sub-Custodian.
SECTION 4.3 FOREIGN SECURITIES SYSTEMS. Foreign securities shall be
maintained in a Foreign Securities System in a designated country only through
arrangements implemented by the Foreign Sub-Custodian in such country pursuant
to the terms of this Agreement.
SECTION 4.4 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
4.4.1. Delivery of Foreign Securities. The Custodian or a Foreign
Sub-Custodian shall release and deliver foreign securities of the Portfolios
held by such Foreign Sub-Custodian, or in a Foreign Securities System account,
only upon receipt of Proper Instructions, which may be continuing instructions
when deemed appropriate by the parties, and only in the following cases:
(i) upon the sale of such foreign securities for the Portfolios in
accordance with commercially reasonable market practice in the
country where such foreign securities are held or traded,
including, without limitation: (A) delivery against expectation
of receiving later payment; or (B) in the case of a sale effected
through a Foreign Securities System in accordance with the rules
governing the operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other
similar offers for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign securities
are called, redeemed, retired or otherwise become payable;
(v) to the issuer thereof, or its agent, for transfer into the name
of the Custodian (or the name of the respective Foreign
Sub-Custodian or of any nominee of the Custodian or such Foreign
Sub-Custodian) or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units;
<PAGE>
(vi) to brokers, clearing banks or other clearing agents for
examination or trade execution in accordance with market custom;
provided that in any such case the Foreign Sub-Custodian shall
have no responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Foreign Sub-Custodian's
own negligence or willful misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities,
the surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
(ix) for delivery as security in connection with any borrowing by the
Portfolios requiring a pledge of assets by the Portfolios;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, but only upon receipt of Proper
Instructions specifying the foreign securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such securities
shall be made.
4.4.2. PAYMENT OF PORTFOLIO MONIES. Upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out, or direct the respective Foreign Sub-Custodian or the
respective Foreign Securities System to pay out, monies of a Portfolio in the
following cases only:
(i) upon the purchase of foreign securities for the Portfolio, unless
otherwise directed by Proper Instructions, by (A) delivering
money to the seller thereof or to a dealer therefor (or an agent
for such seller or dealer) against expectation of receiving later
delivery of such foreign securities; or (B) in the case of a
purchase effected through a Foreign Securities System, in
accordance with the rules governing the operation of such Foreign
Securities System;
(ii) in connection with the conversion, exchange or surrender of
foreign securities of the Portfolio;
(iii) for the payment of any expense or liability of the Portfolio,
including but not limited to the following payments: interest,
<PAGE>
taxes, investment advisory fees, transfer agency fees, fees under
this Agreement, legal fees, accounting fees, and other operating
expenses;
(iv) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Portfolio, including transactions executed with
or through the Custodian or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(vii) in connection with the borrowing or lending of foreign
securities; and
(viii) for any other proper purpose, but only upon receipt of Proper
Instructions specifying the amount of such payment, setting forth
the purpose for which such payment is to be made, declaring such
purpose to be a proper corporate purpose, and naming the person
or persons to whom such payment is to be made.
4.4.3. MARKET CONDITIONS. Notwithstanding any provision of this
Agreement to the contrary, settlement and payment for Foreign Assets received
for the account of the Portfolios and delivery of Foreign Assets maintained for
the account of the Portfolios may be effected in accordance with the customary
established securities trading or processing practices and procedures in the
country or market in which the transaction occurs, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
The Custodian shall provide to the Board the information with respect to
custody and settlement practices in countries in which the Custodian employs a
Foreign Sub-Custodian, including without limitation information relating to
Foreign Securities Systems, described on Schedule C hereto at the time or times
set forth on such Schedule. The Custodian may revise Schedule C from time to
time, provided that no such revision shall result in the Board being provided
with substantively less information than had been previously provided hereunder.
SECTION 4.5 REGISTRATION OF FOREIGN SECURITIES. The foreign securities
maintained in the custody of a Foreign Sub-Custodian (other than bearer
securities) shall be registered in the name of the applicable Portfolio or in
the name of the Custodian or in the name of any Foreign Sub-Custodian or in the
name of any nominee of the foregoing, and the Fund on behalf of such Portfolio
agrees to hold any such nominee harmless from any liability as a holder of
record of such foreign securities. The Custodian or a Foreign Sub-Custodian
shall not be obligated to accept securities on behalf of a Portfolio under the
terms of this Agreement unless the form of such securities and the manner in
which they are delivered are in accordance with reasonable market practice.
SECTION 4.6 BANK ACCOUNTS. The Custodian shall identify on its books as
belonging to the Fund cash (including cash denominated in foreign currencies)
deposited with the Custodian. Where the Custodian is unable to maintain, or
market practice does not facilitate the maintenance of, cash on the books of the
Custodian, a bank account or bank accounts opened and maintained outside the
United States on behalf of a Portfolio with a Foreign Sub-Custodian shall be
<PAGE>
subject only to draft or order by the Custodian or such Foreign Sub-Custodian,
acting pursuant to the terms of this Agreement to hold cash received by or from
or for the account of the Portfolio.
SECTION 4.7 COLLECTION OF INCOME. The Custodian shall use reasonable
commercial efforts to collect all income and other payments with respect to the
Foreign Assets held hereunder to which the Portfolios shall be entitled and
shall credit such income, as collected, to the applicable Portfolio. In the
event that extraordinary measures are required to collect such income, the Fund
and the Custodian shall consult as to such measures and as to the compensation
and expenses of the Custodian relating to such measures.
SECTION 4.8 SHAREHOLDER RIGHTS. With respect to the foreign securities
held pursuant to this Agreement, the Custodian will use reasonable commercial
efforts to facilitate the exercise of voting and other shareholder rights,
subject always to the laws, regulations and practical constraints that may exist
in the country where such securities are issued. The Fund acknowledges that
local conditions, including lack of regulation, onerous procedural obligations,
lack of notice and other factors may have the effect of severely limiting the
ability of the Fund to exercise shareholder rights.
SECTION 4.9 COMMUNICATIONS RELATING TO FOREIGN SECURITIES. The Custodian
shall transmit promptly to the Fund written information (including, without
limitation, pendency of calls and maturities of foreign securities and
expirations of rights in connection therewith) received by the Custodian via the
Foreign Sub-Custodians from issuers of the foreign securities being held for the
account of the Portfolios. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Fund written information so received by
the Custodian from issuers of the foreign securities whose tender or exchange is
sought or from the party (or its agents) making the tender or exchange offer.
The Custodian shall not be liable for any untimely exercise of any tender,
exchange or other right or power in connection with foreign securities or other
property of the Portfolios at any time held by it unless (i) the Custodian or
the respective Foreign Sub-Custodian is in actual possession of such foreign
securities or property and (ii) the Custodian receives Proper Instructions with
regard to the exercise of any such right or power, and both (i) and (ii) occur
at least three business days prior to the date on which the Custodian is to take
action to exercise such right or power
SECTION 4.10 LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES
SYSTEMS. Each agreement pursuant to which the Custodian employs as a Foreign
Sub-Custodian shall, to the extent possible, require the Foreign Sub-Custodian
to exercise reasonable care in the performance of its duties and, to the extent
possible, to indemnify, and hold harmless, the Custodian from and against any
loss, damage, cost, expense, liability or claim arising out of or in connection
with the Foreign Sub-Custodian's performance of such obligations. At the Fund's
election, the Portfolios shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that the Portfolios have not been made whole for any such loss,
damage, cost, expense, liability or claim.
SECTION 4.11 TAX LAW. The Custodian shall have no responsibility or
liability for any obligations now or hereafter imposed on the Fund, the
Portfolios or the Custodian as custodian of the Portfolios by the tax law of the
United States or of any state or political subdivision thereof. It shall be the
<PAGE>
responsibility of the Fund to notify the Custodian of the obligations imposed on
the Fund with respect to the Portfolios or the Custodian as custodian of the
Portfolios by the tax law of countries other than those mentioned in the above
sentence, including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.
SECTION 4.12 CONFLICT. If the Custodian is delegated the
responsibilities of Foreign Custody Manager pursuant to the terms of Section 3
hereof, in the event of any conflict between the provisions of Sections 3 and 4
hereof, the provisions of Section 3 shall prevail.
SECTION 5. PAYMENTS FOR SALES OR REPURCHASES OR REDEMPTIONS OF SHARES. The
Custodian shall receive from the distributor for the Shares or from the Transfer
Agent and deposit into the account of the appropriate Portfolio such payments as
are received for Shares thereof issued or sold from time to time by the Fund.
The Custodian will provide timely notification to the Fund on behalf of each
such Portfolio and the Transfer Agent of any receipt by it of payments for
Shares of such Portfolio.
From such funds as may be available for the purpose, the Custodian
shall, upon receipt of instructions from the Transfer Agent, make funds
available for payment to holders of Shares who have delivered to the Transfer
Agent a request for redemption or repurchase of their Shares. In connection with
the redemption or repurchase of Shares, the Custodian is authorized upon receipt
of instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares, the Custodian shall honor checks drawn on the Custodian
by a holder of Shares, which checks have been furnished by the Fund to the
holder of Shares, when presented to the Custodian in accordance with such
procedures and controls as are mutually agreed upon from time to time between
the Fund and the Custodian.
SECTION 6. PROPER INSTRUCTIONS. Proper Instructions as used throughout this
Agreement means a writing signed or initialed by one or more person or persons
as the Board shall have from time to time authorized. Each such writing shall
set forth the specific transaction or type of transaction involved, including a
specific statement of the purpose for which such action is requested. Oral
instructions will be considered Proper Instructions if the Custodian reasonably
believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Fund shall cause all
oral instructions to be confirmed in writing. Proper Instructions may include
communications effected directly between electro-mechanical or electronic
devices provided that the Fund and the Custodian agree to security procedures,
including but not limited to, the security procedures selected by the Fund in
the Funds Transfer Addendum attached hereto. For purposes of this Section,
Proper Instructions shall include instructions received by the Custodian
pursuant to any three-party agreement which requires a segregated asset account
in accordance with Section 2.10.
SECTION 7. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY. The Custodian may in
its discretion, without express authority from the Fund on behalf of each
applicable Portfolio:
<PAGE>
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under
this Agreement, provided that all such payments shall be
accounted for to the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Portfolio, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and
other dealings with the securities and property of the Portfolio
except as otherwise directed by the Board.
SECTION 8. EVIDENCE OF AUTHORITY. The Custodian shall be protected in acting
upon any instructions, notice, request, consent, certificate or other instrument
or paper believed by it to be genuine and to have been properly executed by or
on behalf of the Fund. The Custodian may receive and accept a copy of a
resolution certified by the Secretary or an Assistant Secretary of the Fund
("CERTIFIED RESOLUTION") as conclusive evidence (a) of the authority of any
person to act in accordance with such resolution or (b) of any determination or
of any action by the Board as described in such resolution, and such resolution
may be considered as in full force and effect until receipt by the Custodian of
written notice to the contrary.
SECTION 9. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND
CALCULATION OF NET ASSET VALUE AND NET INCOME. The Custodian shall cooperate
with and supply necessary information to the entity or entities appointed by the
Board to keep the books of account of each Portfolio and/or compute the net
asset value per Share of the outstanding Shares or, if directed in writing to do
so by the Fund on behalf of the Portfolio, shall itself keep such books of
account and/or compute such net asset value per Share. If so directed, the
Custodian shall also calculate daily the net income of the Portfolio as
described in the Prospectus and shall advise the Fund and the Transfer Agent
daily of the total amounts of such net income and, if instructed in writing by
an officer of the Fund to do so, shall advise the Transfer Agent periodically of
the division of such net income among its various components. The calculations
of the net asset value per Share and the daily income of each Portfolio shall be
made at the time or times described from time to time in the Prospectus.
SECTION 10. RECORDS. The Custodian shall with respect to each Portfolio create
and maintain all records relating to its activities and obligations under this
Agreement in such manner as will meet the obligations of the Fund under the 1940
Act, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder. All such records shall be the property of the Fund and shall at all
times during the regular business hours of the Custodian be open for inspection
by duly authorized officers, employees or agents of the Fund and employees and
agents of the SEC. The Custodian shall, at the Fund's request, supply the Fund
with a tabulation of securities owned by each Portfolio and held by the
Custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
SECTION 11. OPINION OF FUND'S INDEPENDENT ACCOUNTANT. The Custodian shall take
all reasonable action, as the Fund on behalf of each applicable Portfolio may
<PAGE>
from time to time request, to obtain from year to year favorable opinions from
the Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, and Form N-SAR or other
annual reports to the SEC and with respect to any other requirements thereof.
SECTION 12. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS. The Custodian
shall provide the Fund, on behalf of each of the Portfolios at such times as the
Fund may reasonably require, with reports by independent public accountants on
the accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures contracts,
including securities deposited and/or maintained in a U.S. Securities System or
a Foreign Securities System, relating to the services provided by the Custodian
under this Agreement; such reports, shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so state.
SECTION 13. COMPENSATION OF CUSTODIAN. The Custodian shall be entitled to
reasonable compensation for its services and expenses as Custodian, as agreed
upon from time to time between the Fund on behalf of each applicable Portfolio
and the Custodian.
SECTION 14. RESPONSIBILITY OF CUSTODIAN. So long as and to the extent that it is
in the exercise of reasonable care, the Custodian shall not be responsible for
the title, validity or genuineness of any property or evidence of title thereto
received by it or delivered by it pursuant to this Agreement and shall be held
harmless in acting upon any notice, request, consent, certificate or other
instrument reasonably believed by it to be genuine and to be signed by the
proper party or parties, including any futures commission merchant acting
pursuant to the terms of a three-party futures or options agreement. The
Custodian shall be held to the exercise of reasonable care in carrying out the
provisions of this Agreement, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice. The Custodian shall be without liability to the Fund and the Portfolios
for any loss, liability, claim or expense resulting from or caused by anything
which is (A) part of Country Risk (as defined in Section 3 hereof), including
without limitation nationalization, expropriation, currency restrictions, or
acts of war, revolution, riots or terrorism, or (B) part of the "prevailing
country risk" of the Portfolios, as such term is used in SEC Release Nos.
IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are now
or in the future interpreted by the SEC or by the staff of the Division of
Investment Management thereof.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, the interruption, suspension or restriction of trading on or the
closure of any securities market, power or other mechanical or technological
failures or interruptions, computer viruses or communications disruptions, work
stoppages, natural disasters, or other similar events or acts; (ii) errors by
the Fund or the Investment Advisor in their instructions to the Custodian
provided such instructions have been in accordance with this Agreement; (iii)
<PAGE>
the insolvency of or acts or omissions by a Securities System; (iv) any delay or
failure of any broker, agent or intermediary, central bank or other commercially
prevalent payment or clearing system to deliver to the Custodian's sub-custodian
or agent securities purchased or in the remittance or payment made in connection
with securities sold; (v) any delay or failure of any company, corporation, or
other body in charge of registering or transferring securities in the name of
the Custodian, the Fund, the Custodian's sub-custodians, nominees or agents or
any consequential losses arising out of such delay or failure to transfer such
securities including non-receipt of bonus, dividends and rights and other
accretions or benefits; (vi) delays or inability to perform its duties due to
any disorder in market infrastructure with respect to any particular security or
Securities System; and (vii) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or
any other country, or political subdivision thereof or of any court of competent
jurisdiction.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian (as defined in Section 4 hereof) to the same extent as set forth
with respect to sub-custodians generally in this Agreement.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement) or
in the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Agreement, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable Portfolio shall
be security therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to dispose of such
Portfolio's assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
SECTION 15. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT. This Agreement shall
become effective as of its execution, shall continue in full force and effect
until terminated as hereinafter provided, may be amended at any time by mutual
agreement of the parties hereto and may be terminated by either party by an
instrument in writing delivered or mailed, postage prepaid to the other party,
such termination to take effect not sooner than sixty (60) days after the date
of such delivery or mailing; provided, however, that the Fund shall not amend or
terminate this Agreement in contravention of any applicable federal or state
regulations, or any provision of the Fund's Articles of Incorporation, and
further provided, that the Fund on behalf of one or more of the Portfolios may
at any time by action of its Board (i) substitute another bank or trust company
for the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Agreement in the event of the appointment of a
<PAGE>
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Agreement, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
SECTION 16. SUCCESSOR CUSTODIAN. If a successor custodian for one or more
Portfolios shall be appointed by the Board, the Custodian shall, upon
termination, deliver to such successor custodian at the office of the Custodian,
duly endorsed and in the form for transfer, all securities of each applicable
Portfolio then held by it hereunder and shall transfer to an account of the
successor custodian all of the securities of each such Portfolio held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a Certified Resolution, deliver at the office of
the Custodian and transfer such securities, funds and other properties in
accordance with such resolution.
In the event that no written order designating a successor custodian or
Certified Resolution shall have been delivered to the Custodian on or before the
date when such termination shall become effective, then the Custodian shall have
the right to deliver to a bank or trust company, which is a "bank" as defined in
the 1940 Act, doing business in Boston, Massachusetts, or New York, New York, of
its own selection, having an aggregate capital, surplus, and undivided profits,
as shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian on behalf of each
applicable Portfolio and all instruments held by the Custodian relative thereto
and all other property held by it under this Agreement on behalf of each
applicable Portfolio, and to transfer to an account of such successor custodian
all of the securities of each such Portfolio held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Agreement.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the Certified Resolution to appoint a successor
custodian, the Custodian shall be entitled to fair compensation for its services
during such period as the Custodian retains possession of such securities, funds
and other properties and the provisions of this Agreement relating to the duties
and obligations of the Custodian shall remain in full force and effect.
SECTION 17. INTERPRETIVE AND ADDITIONAL PROVISIONS. In connection with the
operation of this Agreement, the Custodian and the Fund on behalf of each of the
Portfolios, may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Fund's Articles of Incorporation. No interpretive or additional provisions
made as provided in the preceding sentence shall be deemed to be an amendment of
this Agreement.
<PAGE>
SECTION 18. ADDITIONAL FUNDS. In the event that the Fund establishes one or more
series of Shares in addition to the series in existence on the date hereto with
respect to which it desires to have the Custodian render services as custodian
under the terms hereof, it shall so notify the Custodian in writing, and if the
Custodian agrees in writing to provide such services, such series of Shares
shall become a Portfolio hereunder.
SECTION 19. MASSACHUSETTS LAW TO APPLY. This Agreement shall be construed and
the provisions thereof interpreted under and in accordance with laws of The
Commonwealth of Massachusetts.
SECTION 20. PRIOR AGREEMENTS. This Agreement supersedes and terminates, as of
the date hereof, all prior Agreements between the Fund on behalf of each of the
Portfolios and the Custodian relating to the custody of the Fund's assets.
SECTION 21. NOTICES. Any notice, instruction or other instrument required to be
given hereunder may be delivered in person to the offices of the parties as set
forth herein during normal business hours or delivered prepaid registered mail
or by telex, cable or telecopy to the parties at the following addresses or such
other addresses as may be notified by any party from time to time.
To the Fund: Morgan Keegan Select Fund, Inc.
Morgan Keegan Tower
50 Front Street
Memphis, Tennessee 38103
Attention: Charles D. Maxwell
Telephone: (901) 579-4243
Telecopy: (901) 529-5342
To the Custodian: STATE STREET BANK AND TRUST COMPANY
801 Pennsylvania Avenue
Kansas City, Missouri 64105
Attention: Vice President, Custody
Telephone: (816) 871-4100
Telecopy: (816) 871-9646
Such notice, instruction or other instrument shall be deemed to have
been served in the case of a registered letter at the expiration of five
business days after posting, in the case of cable twenty-four hours after
dispatch and, in the case of telex, immediately on dispatch and if delivered
outside normal business hours it shall be deemed to have been received at the
next time after delivery when normal business hours commence and in the case of
cable, telex or telecopy on the business day after the receipt thereof. Evidence
that the notice was properly addressed, stamped and put into the post shall be
conclusive evidence of posting.
SECTION 22. REPRODUCTION OF DOCUMENTS. This Agreement and all schedules,
addenda, exhibits, attachments and amendments hereto may be reproduced by any
photographic, photostatic, microfilm, micro-card, miniature photographic or
other similar process. The parties hereto all/each agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is in
<PAGE>
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
SECTION 23. DATA ACCESS SERVICES ADDENDUM. The Custodian and the Fund agree to
be bound by the terms of the Data Access Services Addendum attached hereto.
SECTION 24. SHAREHOLDER COMMUNICATIONS ELECTION. SEC Rule 14b-2 requires banks
which hold securities for the account of customers to respond to requests by
issuers of securities for the names, addresses and holdings of beneficial owners
of securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [X] The Custodian is not authorized to release the Fund's name,
address, and share positions.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative.
MORGAN KEEGAN SELECT FUND STATE STREET BANK AND TRUST COMPANY
By: /s/ Charles O. Maxwell By: /s/ W. Andrew Fry
-------------------------- --------------------------------
Name: Charles O. Maxwell Name: W. Andrew Fry
-------------------------- --------------------------------
Title: Secretary Title: Senior Vice President
-------------------------- --------------------------------
Exhibit (i)
KIRKPATRICK & LOCKHART LLP
1800 Massachusetts Avenue, N.W.
Washington, D. C. 20036
(202) 778-9000
October 28, 1999
Morgan Keegan Select Fund, Inc.
Fifty Front Street
Memphis, Tennessee 38103
Dear Sir or Madam:
You have requested our opinion, as counsel to Morgan Keegan Select
Fund, Inc. (the "Fund") as to certain matters regarding the issuance of certain
Shares of the Fund. As used in this letter, the term "Shares" means the shares
of common stock of the Fund that may be issued during the time that
Post-Effective Amendment No. 1 to the Fund's Registration Statement on Form N-1A
("PEA") is effective and has not been superseded by another post-effective
amendment.
As such counsel, we have examined certified or other copies, believed
by us to be genuine, of the Fund's Articles of Incorporation and By-Laws and
such resolutions and minutes of meetings of Fund's Board of Directors as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) of the State of Maryland that in
our experience are normally applicable to the issuance of shares by registered
investment companies organized as corporations under the laws of that State and
to the Securities Act of 1933 ("1933 Act"), the Investment Company Act of 1940
("1940 Act") and the regulations of the Securities and Exchange Commission
("SEC") thereunder.
Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by the Fund and that, when sold, the Shares will
have been validly issued, fully paid and non-assessable, provided that (1) the
Shares are sold in accordance with the terms contemplated by the PEA, including
receipt by the Fund of full payment for the Shares and compliance with the 1933
Act and the 1940 Act, and (2) the aggregate number of Shares issued, when
combined with all other then-outstanding shares, does not exceed the number of
Shares that the Fund is authorized to issue.
<PAGE>
Morgan Keegan Select Fund, Inc.
October 28, 1999
Page 2
We hereby consent to the filing of this opinion accompanying the PEA
when it is filed with the SEC and the reference to our firm under the caption
"Legal Counsel" in the Statement of Additional Information that is being filed
as part of the PEA.
Sincerely,
/s/ KIRKPATRICK & LOCKHART LLP
KIRKPATRICK & LOCKHART LLP
Exhibit (j) (1)
KPMG Telephone (901) 523-3131
Morgan Keegan Tower, Suite 900 Fax (901) 523-8877
Fifty North Front Street
Memphis, TN 38103
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors and Shareholders of
Morgan Keegan Intermediate Bond Fund
Morgan Keegan High Income Fund
(funds within the Morgan Keegan Select Fund, Inc):
We consent to the use of our report dated July 30, 1999 incorporated by
reference herein and to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "The Fund's Certified Public Accountants" in
the Statement of Additional Information.
/s/ KPMG LLP
Memphis, Tennessee
October 28, 1999
